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Gooley's - chpt 3 Partnership Law, Corporations and Associations Law Principles and Issues 6th ed Ch03 waterma

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CHAPTER 3
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The Law of
Partnership
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■ Introduction .................................................................................................................................. 3.1
■ Determining when a partnership exists ........................................................................... 3.7
■ Necessary elements ........................................................................................................... 3.7
■ Statutory rules ...........................................................................................................................3.25
■ Rule 1: Co-ownership.......................................................................................................3.28
■ Rule 2: Sharing of gross returns ..................................................................................3.30
■ Rule 3: Profit and loss sharing ......................................................................................3.32
■ Creation of a partnership .....................................................................................................3.39
■ Relationship of partners to outsiders .............................................................................3.40
■ The Partnership Act ..........................................................................................................3.41
■ Other sections of the Partnership Act regulating partner’s
dealings with outsiders ...................................................................................................3.53
■ Liability in contract, tort and crime............................................................................3.57
■ Relationship of partners to each other ..........................................................................3.65
■ The fiduciary relationship between partners ........................................................3.65
■ The duty to render accounts........................................................................................3.68
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Private profit of partners ...............................................................................................3.71
Duties of partners as set out in the Partnership Act ..........................................3.75
■ Dissolution of a partnership ................................................................................................3.76
■ Limited liability partnerships ...............................................................................................3.79
■ Definition...............................................................................................................................3.80
■ Number of partners .........................................................................................................3.81
■ Formation ..............................................................................................................................3.82
■ Changes to registered particulars .............................................................................3.84
■ Modification of the general law of partnership ...................................................3.85
■ Management........................................................................................................................3.86
■ Dissolution ............................................................................................................................3.87
■ Cessation ..............................................................................................................................3.88
■ Incorporated limited partnerships....................................................................................3.89
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The Law of Partnership
INTRODUCTION
3.1
A partnership is the relationship which exists between persons carrying on
a business in common with a view to profit. It involves an agreement between
two or more parties to enter into a legally binding relationship and is essentially
contractual in nature. According to Tindal CJ in Green v Beesley (1835) 2 Bing NC 108
at 112; 132 ER 43 at 45, ‘I have always understood the definition of partnership to
be a mutual participation in profit and loss’, yet the participants do not create a
legal entity when they create a partnership. James LJ in Smith v Anderson (1880) 15
Ch D 247 at 2731 saw the concept in the following way:
3.2
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An ordinary partnership is a partnership composed of definite individuals
bound together by contract between themselves to continue combined
for some joint object, either during pleasure or during a limited time, and
is essentially composed of the persons originally entering into the contract
with one another.
A partnership can be the product of a formal document between parties or it can
be inferred from the words and conduct of those parties when viewed objectively:
Dwyer v Lippiatt (2004) 50 ACSR 333; Salib v Gakas; Newport Pacific Pty Ltd v Salib
[2010] NSWSC 505 at [233]. According to Fletcher:2
Whether a business is being conducted on behalf of the persons alleged
to be partners is a difficult question of fact which can only be answered
by a careful examination of all the circumstances surrounding the dealings
between those persons in each particular case.
3.3
Each of the states and territories has legislated with respect to partnership law.
In this regard, the relevant legislation is the Partnership Act 1963 (ACT);
Partnership Act 1892 (NSW); Partnership Act 1997 (NT); Partnership Act 1891 (Qld);
Partnership Act 1891 (SA); Partnership Act 1891 (Tas); Partnership Act 1958 (Vic); and
Partnership Act 1895 (WA).
In this chapter, where references are made to the ‘Partnership Act’, that reference
will be, unless indicated to the contrary, to a reference to the Partnership Act 1892
(NSW). However, there will, wherever possible, be a footnote reference listing each
jurisdiction where a similar provision is contained in the relevant Partnership Act of
the other states and territories to that set out in the New South Wales Act.
C
Pursuant to the Partnership Act, a partnership is defined3 as the relationship that
exists between persons carrying on business in common with a view to profit.
This definition includes ‘incorporated limited partnerships’ and excludes the
relationship between members of any company or association incorporated under
the Corporations Act 2001 (Cth) or formed or incorporated by or in pursuance of
any other Act of Parliament or Letters Patent or Royal Charter.
1.
R Baxt, K Fletcher & S Fridman, Corporations and Associations: Cases and Materials, 10th ed, LexisNexis Butterworths,
Sydney, 2009, [1.4C].
2.
K L Fletcher, The Law of Partnership in Australia, 9th ed, Thomson Lawbook Co, Sydney, 2007, [2.15].
3.
ACT s 6; NSW s 1; NT s 5; Qld s 5; SA s 1; Tas s 6; Vic s 5; WA s 7.
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Corporations and Associations Law: Principles and Issues
3.4
Further, there are limitations on the number of persons that can form a single
partnership. In this regard, s 115 of the Corporations Act provides that a person
must not participate in the formation of a partnership or association that:
(a)
has an object gain for itself or for any of its members; and
(b)
has more than 20 members;
unless the partnership or association is incorporated or formed under an
Australian law.
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The consequences of offending s 115 of the Corporations Act appear in s 103 and
in s 115(3) of that Act. In addition, the Corporations Regulations 2001 may specify
a higher number than the number referred to in (b) above for the purposes of the
application of that paragraph to a particular kind of partnership or association.
Relevant to this aspect is Pt 2A.1.01 of the Corporations Regulations. Pursuant to
that Part of those Regulations, as at March 2015, the number prescribed for a kind
of partnership or association is as follows:
• Actuaries, medical practitioners, patent attorneys, sharebrokers, stockbrokers
or trademark attorneys can have up to 50 partners.
• Partnerships or associations that have as their primary purpose collaborative
scientific research and which include as members at least one university and
one private sector participant can have up to 50 partners.
• Architects, pharmaceutical chemists or veterinary surgeons can have up to
100 partners.
• Legal practitioners can have up to 400 partners.
• Accountants can have up to 1000 partners.
3.5
3.6
A partnership will have a name (called a firm name) and this is registered under the
Business Names Registration Act 2011 (Cth), discussed in Chapter 2.
Partnership law derives both from case law and from statute law. The relevant
legislation is to be found in each state Partnership Act.4 This area of the law
has been described as a special type of agency. The main reason for this is that
partners, when acting in the course of the partnership business, are acting as
agents for one another: Lang v Morrison & Co Ltd (1911) 13 CLR 1 at 11.
C
DETERMINING WHEN A PARTNERSHIP EXISTS
Necessary elements
3.7
The Partnership Act5 provides that three elements must be satisfied in order to
establish the existence of a partnership. These elements are:
• the carrying on of a business;
• in common;
• with a view to profit.
4.
Partnership Act 1963 (ACT); Partnership Act 1892 (NSW); Partnership Act 1997 (NT); Partnership Act 1891 (Qld); Partnership
Act 1891 (SA); Partnership Act 1891 (Tas); Partnership Act 1958 (Vic); Partnership Act 1895 (WA).
5.
ACT s 6; NSW s 1; NT s 5; Qld s 5; SA s 1; Tas s 6; Vic s 5; WA s 7.
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3.8
The above definition of partnership is the relationship which exists between
persons carrying on business in common with a view to profit. If one of these
elements is missing, the relationship is not one of partnership. The criteria should
be viewed objectively: Duke Group Ltd (in liq) v Pilmer (1998) 27 ACSR 1 at 475.
The description that the parties may themselves have placed on their relationship
is not conclusive. This applies equally to where parties say they are not in a
partnership relationship (Adam v Newbigging (1888) 13 App Cas 308 at 316; Weiner
v Harris [1910] 1 KB 285 at 290; Duke Group Ltd (in liq) v Pilmer (1998) 27 ACSR 1
at 475; Lindley & Banks6) and where they state they are in one: Commissioners
of Inland Revenue v Williamson (1928) 14 TC 335 at 340; Duke Group Ltd (in liq)
v Pilmer (1998) 27 ACSR 1 at 475.
3.9
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Therefore, the parties’ private intentions are said to be irrelevant in determining
this question: Halsbury’s Laws of Australia, vol 19, L Brown & M Standen,
Butterworths, Sydney, [305-15]. The important question is the substance of the
transaction (Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales
(Finance) Pty Ltd (1974) 131 CLR 321 at 327; 3 ALR 409),7 having regard to all the
circumstances of the relationship. Where the agreement between the parties
is in writing, the agreement must be construed as a whole. If the agreement is
not in writing, the intention of the parties must be ascertained from their words
and conduct.8
The Partnership Act also sets out some rules9 which are useful indicators in
determining whether a particular relationship is a partnership relationship. These
include the rule that the sharing of gross returns does not of itself create a
partnership and that 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. These rules will
be referred to later in this chapter.
Carrying on a business
It is essential that participants in a partnership carry on business in common;
however, it is not necessary that they all personally participate in the day-to-day
work of the business or in the direction and management of the business. It is
sufficient that the business is carried out on their behalf. Carrying on a business
‘in common’ requires a relationship of agency, where each party carrying on
business is acting on behalf of the others, and the existence of a mutuality of
rights and obligations between the parties: Cox v Hickman [1860] EngR 1068;
(1860) 8 HLC 268; Pooley v Driver [1876] 5 Ch D 458; Duke Group Ltd (in liq) v Pilmer
(1998) 27 ACSR 1 at 477.
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3.10
The task of determining what is meant by the phrase ‘carrying on a business’
has raised the issue of whether there is a need to establish some repetitiveness
of action, as opposed to isolated action taken by the parties. A number of early
decisions emphasised the need for continuity or repetition. In Smith v Anderson
(1880) 15 Ch D 247,10 a group of investors subscribed for the purchase of shares
6.
R C I Banks, Lindley & Banks on Partnership, 19th ed, Sweet & Maxwell, London, 2010, [5-03], p 79.
7.
Baxt, Fletcher & Fridman, see note 1 above, [1.8C].
8.
Banks, see note 6 above, [5-05], p 79.
9.
ACT s 7; NSW s 2; NT s 6; Qld s 6; SA s 2; Tas s 7; Vic s 6; WA s 8.
10.
Baxt, Fletcher & Fridman, see note 1 above, [1.4C].
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through a trust in various submarine cable companies. The shares were sold
to these investors by the trustees of the trust who then issued certificates to
the subscribers. A £100 certificate was issued for each £90 certificate that was
subscribed. Smith, along with more than 20 other people, received a certificate.
Later, Smith applied to wind up the trust on the basis that it was an illegal
association under s 4 of the English Companies Act 1862. Section 4 of this Act
provided, so far as was relevant:
ex
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:
No company, association or partnership consisting of more than twenty
persons shall be formed after the commencement of this Act for the purpose
of carrying on any other business that has for its object the acquisition of gain
by the company, association or partnership, or by the individual members
thereof, unless it is registered.
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The question was whether the trust was a partnership. The court looked at the
nature of the trust and of the relationship of those involved in it. Although each
holder of a certificate could elect trustees of the trust and received a trust report,
and the elected trustees had certain management powers, including the power
to sell the shares and to reinvest or distribute the proceeds, it was noted that the
trustees had no power to speculate and that there were no mutual rights and
obligations among those involved. In these circumstances, the court held that
the trust was not a partnership as there was no association for the purpose of
‘carrying on a business’.
According to Brett LJ (at 277–8):
The expression ‘carrying on’ implies a repetition of acts and excludes the
case of an association formed for doing one particular act which is never to
be repeated. That series of acts is to be a series of acts which constitute a
business … The association, then, must be formed in order to carry on a series
of acts having the acquisition of gain for their object.
3.11
The same judge, then Lord Esher MR, stated in Re Griffin; Ex parte Board of Trade
(1890) 60 LJQB 235 at 237:
If an isolated transaction, which if repeated would be a transaction in a
business, is proved to have been undertaken with the intention that it should
be the first of several transactions, that is with the intent of carrying on a
business, then it is a first transaction in an existing business.
C
In Re Griffin, Griffin bought a piece of land with the intention of building cottages
on it and then selling them. However, at the time of entering into this building
speculation, he had no money. He had also undertaken certain contracts for
making roads, which he could not carry on without borrowing money to pay for
the labour and materials.
One of the questions facing the court was whether Griffin had entered into
business as a builder. The court concluded that there was no evidence that this
was the first of an intended series of transactions.
3.12
Similarly, in Ballantyne v Raphael (1889) 15 VLR 538, a syndicate of more than
20 persons had been formed to acquire a large block of land. The intention was
to subdivide the land and sell individual allotments at a profit. The court, which
approved of Smith v Anderson, held that this was not a company, association or
partnership carrying on business for gain. It was an isolated act, not repetitive.
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3.13
However, the necessity of establishing an intention to continue in business has
been overlooked in some cases. In Ford v Comber (1890) 16 VLR 541, Holroyd J
admitted of the possibility that an agreement to share the costs of acquiring
a single block of land and the profit on resale could constitute a partnership
between the parties. Similarly, the decisions in Trimble v Goldberg [1906] AC 494,
Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd [1961] SR (NSW)
165 and Playfair Development Corporation Pty Ltd v Ryan [1969] 2 NSWR 66111
impliedly acknowledged the validity of a partnership in a single venture.12
In Playfair Development Corporation, a deed entitled ‘Covenants of Partnership’
was entered into between the following parties:
:
• the plaintiff company, described as ‘the manager’;
ex
is
• a trustee company; and
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• two directors of the plaintiff company and the plaintiff company who were called
‘the partners’.
This deed provided for:
• the purchase by the partners of a parcel of land on which were constructed
nine flats;
• the subsequent rental of the flats; and
• the transfer of the land and flats to a trustee.
The deed also:
• restricted the partners applying for a separate certificate of title to the
property;
• expressed that the manager was not to be a partner of the partnership after
it sold the land to the trustee. After the sale it was to be regarded as an
independent contractor; and
• gave the partners power to remove the manager.
C
The plaintiff company purchased the land which it transferred to the trustee. The
plaintiff company then carried on the business of renting the flats to tenants
as well as managing the buildings. It was the intention of the partners to offer
partnership units to members of the public for purchase. Advertisements were
inserted in newspapers to achieve this. Each of the units was ‘one twentieth of the
capital of the partnership’ and the units were to be transferable without bringing
about dissolution of the partnership. The advertisements attracted the attention
of the Registrar of Companies who argued, among other things, that a ‘prescribed
interest’, defined in the Companies Act 1961 (Cth), was being offered to the public.
In such cases, the Registrar argued, a registered prospectus was needed. The
plaintiff argued that they were exempted from having to satisfy the prospectus
requirements because the Companies Act specifically excluded ‘any interest in a
partnership agreement’ from the definition of an ‘interest’.
11.
Baxt, Fletcher & Fridman, see note 1 above, [1.6C].
12.
See also P R Webb, ‘Single Venture Partnerships’ [1971] NZLR 347.
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The court held that there was a partnership notwithstanding that the partnership
units were transferable. According to Street CJ (at 666–7), who distinguished the
case from Smith v Anderson (1880) 15 Ch D 247:13
The High Court was faced with a similar issue in Canny Gabriel Castle Jackson
Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321.14 In this
case, a company named Fourth Media Management Pty Ltd (FM) entered into
contracts with singers Elton John and Cilla Black for performances in Australia.
Volume Sales (Finance) (VS) agreed to finance the contracts.
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:
The ‘partners’, whether they be the original three, or whether they be
20 members of the public who respond to the plaintiff’s invitation, are bound
together by the covenants. The object of that combination is the earning of
profits from the letting of units in the block of flats held by the trustee on
behalf of the partners. The manager, albeit an independent contractor, is in
every sense the manager of the business. The business is that of the partners
… The partners do not have independent interests in the partnership property
or in the partnership business. They may well be physically remote from each
other. But it seems to me inescapable that they submit themselves to mutual
obligations by the terms of the deed of covenant …
Later, an agreement was made between FM and VS whereby it was agreed that:
• FM assign to VS a one-half interest in the contracts with the singers;
• the arrangement between FM and VS was to be performed as a ‘joint venture’;
• VS was to finance the contracts by way of a loan and that this loan was described as
a ‘loan to the joint venture’ which was repayable prior to the distribution of profits;
• the accounts show that the money advanced was a loan;
• all profits were to be shared equally between the parties;
• all policy matters were ‘to be agreed upon by the parties hereto’;
• a bank account of VS be opened and be operated ‘in such manner as VS sees
fit’; and
• the money loaned would be repaid if the contracts with the singers failed.
C
One day after this agreement was made, FM granted an equitable charge over its
undertaking and property including its interest in the box office proceeds of the
contracts to Canny Gabriel Castle Jackson Advertising Pty Ltd, the appellant. The
question was whether VS’s interest would prevail over the later equitable charge.
If the arrangement between FM and VS was a partnership, then VS would have a
beneficial interest which would prevail over the charge. The High Court held that
there was a partnership.
Their Honours noted (at 327):
In short, it seems to us that the contract exhibited all the indicia of a
partnership except that it did not describe the parties as partners and did
not provide expressly for the sharing of losses, although we venture to think
that it did so impliedly.
13.
Baxt, Fletcher & Fridman, see note 1 above, [1.4C].
14.
Baxt, Fletcher & Fridman, see note 1 above, [1.8C].
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Factors which led the court to the conclusion that a partnership existed were
stated by McTiernan, Menzies and Mason JJ (at 326) as follows:
the parties became joint venturers in a commercial enterprise with a
view to profit;
(2)
profits were to be shared;
(3)
the policy of the joint venture was a matter for joint agreement and it
was provided that differences relating to the affairs of the joint venture
should be settled by arbitration;
(4)
an assignment of a half interest in the contracts for the appearances
of Cilla Black and Elton John was attempted, although, we would have
thought, unsuccessfully;
(5)
the parties were concerned with the financial stability of one another in
a way which is common with partners.
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(1)
The finding by the High Court that the arrangement between the parties was a
partnership implicitly acknowledged that a single commercial venture could be a
‘business’ in order to satisfy the requirements set out in the Partnership Act.
3.15
Another example of where a single activity to be carried out by parties was held
to be a partnership is United Dominions Corporation Ltd v Brian Pty Ltd (1985)
157 CLR 1.16 In that case, the second respondent, Security Projects Ltd (SPL),
was engaged in promoting two distinct but related ‘joint ventures’ involving the
development of land which it was buying in Brisbane. One proposed joint venture
involved the development of part of the land as a hotel. The other involved the
development of the residue of the land as a shopping centre. By September 1973,
the participants in each proposed venture had been settled. Brian Pty Ltd was
to have a 20 per cent share in the hotel venture and a 5 per cent share in the
shopping centre venture. United Dominions Corporation Ltd (UDC) was also to be
a participant in both ventures; however, SPL was to be the main participant in each
proposed venture.
C
3.16
The decision in Canny Gabriel Castle Jackson Advertising Pty Ltd 15 was applied in
Television Broadcasters Ltd v Ashton’s Nominees Pty Ltd (No 1) (1979) 22 SASR 552.
However, in that case it was held that a joint venture for the promotion of a circus
tour did not make the participants partners. The court noted that although the
parties became joint venturers with a view to profit and provided for the sharing of
these profits, there was no agreement for the sharing of losses and, importantly,
the respective obligations contained in the parties’ agreement were regarded as
separate obligations. Further evidence for the lack of a partnership was found in
the fact that employees were regarded as employees of the defendant and not as
employees of the parties jointly: see also Ex parte Coral Investments Pty Ltd [1979]
Qd R 292.
Draft joint venture agreements had been circulated among the proposed
participants, but not finalised. It was not until 23 July 1974 that a formal agreement
in respect of the shopping centre venture was executed. Approximately 90 per
cent of the capital for each project was to be provided by borrowings from UDC,
15.
Baxt, Fletcher & Fridman, see note 1 above, [1.8C].
16.
Baxt, Fletcher & Fridman, see note 1 above, [1.24C].
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with the remainder being contributed by each of the proposed participants
according to their respective shares. The prospective parties to the hotel venture,
including Brian Pty Ltd, had, by September 1973, all made payments to SPL as
project manager. The prospective participants in the shopping centre project
had also made financial contributions, except for Brian Pty Ltd, which made a
contribution in November 1973.
In October 1973, SPL mortgaged the land to UDC as security for borrowings for
the two ventures. Later, two further mortgages were also executed by SPL in
UDC’s favour.
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In August 1974, the hotel project was abandoned and thereafter the whole of
the land was devoted to the shopping centre project. The shares of the various
parties were rationalised. Eventually the shopping centre was built and sold at a
large profit. However, Brian Pty Ltd received neither repayment of the money it
contributed nor payment of a share of the profit. UDC claimed to be entitled to
retain all profits because of a ‘collateralisation clause’ in a mortgage given to it by
SPL before the joint venture agreement was formalised. The effect of this clause
was to charge the land with all indebtedness incurred by SPL in the venture.
When SPL went into liquidation, the question was whether UDC stood in a fiduciary
relationship to Brian Pty Ltd on the date on which SPL gave to UDC the mortgage
containing the collateralisation clause.
The High Court held that UDC stood in a fiduciary relationship to Brian Pty Ltd and
had breached this duty. Importantly, their Honours stated that fiduciary obligations
were not confined to persons who actually are partners, ‘but extend to persons
negotiating for a partnership, but between whom no partnership as yet exists’.
This meant that UDC could not rely on the collateralisation clause. According to
Mason, Brennan and Deane JJ (at 2):
[T]he three mortgages upon which UDC seeks to rely were, to the extent that
they would authorise UDC to retain Brian’s share of the surplus of the ‘joint
venture’, given by SPL and accepted by UDC in breach of the fiduciary duty
which each owed to Brian.
C
The agreement of 23 July 1974, although describing the parties as engaging in a
‘joint venture’, was in essence a partnership agreement dealing with a ‘partnership
for one transaction’. On this point, Dawson J noted (at 15):
[T]he requirement that a business should be carried on provides no clear
means of distinguishing a joint venture from a partnership. There may be a
partnership for a single adventure or undertaking, for the Acts provide that,
subject to any agreement between the partners, a partnership, if entered
into for a single adventure or undertaking, is dissolved by the termination of
that adventure or undertaking. See, for example, Partnership Act 1892 (NSW),
s 32(b).
A single adventure under our law may or may not, depending upon its scope,
amount to the carrying on of a business: Smith v Anderson (1880) 15 Ch D 247
at 277–278;17 Re Griffin; Ex parte Board of Trade (1890) 60 LJQB 235 at 237;
Ballantyne v Raphael (1889) 15 VLR 538. Whilst the phrase ‘carrying on a
17.
Baxt, Fletcher & Fridman, see note 1 above, [1.4C].
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business’ contains an element of continuity or repetition in contrast with an
isolated transaction which is not to be repeated, the decision of this court in
Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance)
Pty Ltd (1974) 131 CLR 32118 suggests that the emphasis which will be placed
upon continuity may not be heavy.
3.17
This finding, supporting the existence of single venture partnerships, can cause
some confusion in regard to non-partnership joint ventures and syndicates. Some
reference to this dilemma was made in United Dominions Corporation Ltd v Brian
Pty Ltd.19 On this point, the High Court stated (at 10):
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The term ‘joint venture’ is not a technical one with a settled common law
meaning. As a matter of ordinary language, it connotes an association of
persons for the purposes of a particular trading, commercial, mining or other
financial undertaking or endeavour with a view to mutual profit, with each
participant usually (but not necessarily) contributing money, property or
skill. Such a joint venture … will often be a partnership. The term is, however,
apposite to refer to a joint undertaking or activity carried out through a
medium other than a partnership such as a company, a trust, an agency or
joint ownership. The borderline between what can properly be described as
a ‘joint venture’ and what should more properly be seen as no more than a
simple contractual relationship may on occasions be blurred. Thus, where
one party contributes only money or other property, it may sometimes be
difficult to determine whether a partnership is a joint venture in which both
parties are entitled to a share of profits or a simple contract of loan or lease
under which the interest or rent payable to the party providing the money or
property is determined by reference to the profits made by the other.
Carrying on a business in common
To constitute a partnership the business must be carried on by, or on behalf of,
all the partners (Re Ruddock (1879) 5 VLR (IP & M) 51); however, all the partners
need not take an active role. In Lang v James Morrison & Co Ltd (1912) 13 CLR 1,
an action was brought by an English company, James Morrison & Co Ltd, against
three defendants, J W McFarland, T Lang and W Keates. The plaintiffs carried on
the business of receiving and disposing of frozen meat from abroad. They alleged
that the three defendants carried on business in Melbourne as partners under the
names ‘Thomas McFarland & Co’ and on occasions ‘McFarland, Lang and Keates’.
Before the action commenced, J McFarland and W Keates became insolvent and
the action proceeded against their assignees and Lang. At the trial, judgment was
given for the plaintiffs and Lang appealed to the High Court.
C
3.18
The High Court held that there was no partnership. According to Griffith CJ (at 6):
… the real substance of the transaction was that the plaintiffs and Thomas
McFarland & Co agreed to enter into a joint venture. They were not partners
as against third parties, but each party had certain rights against each other.
Evidence for this finding was found in the fact that separate bank accounts were
kept as it was apparent that neither Lang nor Keates operated on the account of
18.
Baxt, Fletcher & Fridman, see note 1 above, [1.8C].
19.
Baxt, Fletcher & Fridman, see note 1 above, [1.24C].
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Thomas McFarland & Co. Further, Lang and Keates took no part in the business
of the new firm other than to sign two letters. Griffith CJ saw this as decisive.
According to his Honour (at 11):
Now in order to establish that there was a partnership it is necessary to prove
that JW McFarland carried on the business of Thomas McFarland & Co on
behalf of himself, Lang and Keates, in this sense, that he was their agent in
what he did under the contract with the plaintiffs.
In the circumstances, the court found that there was no such agency.
This position can be compared with Re Ruddock (1879) 5 VLR (IP & M) 51. Ruddock,
who carried on business as a sole trader, became indebted to Mrs Bear, the
grandmother of one of his employees. The employee was 19 years old. Ruddock
entered into an agreement under seal with Mrs Bear whereby she was to purchase a
one-quarter share of the business — the ultimate benefit would go to the grandson.
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Under the agreement:
• Mrs Bear had full control over the share, including the power of disposition
(until the grandson attained 21 years, died before attaining such an age or if he
displeased her in any way).
• The purchase price of the share was to be treated as having been paid by the
discharge of the debt owing to Mrs Bear.
• Mrs Bear would receive a one-quarter share of the net profits. However, it was
expressly agreed that she should not be liable as a partner for any losses and
that Ruddock would indemnify her.
• Mrs Bear’s name was not to be used and she was not to be held out as a partner.
• Mrs Bear had access to the books and Ruddock was to behave and manage the
business ‘as one partner should do to another’.
At a subsequent date, Ruddock consulted with Mrs Bear as to the disposal of
another one-quarter share in the business and, at all times during the negotiations
for the sale of this share, acted on the basis that her consent was essential.
Mrs Bear replied that she had no objection to the sale. Later Ruddock became
bankrupt and Mrs Bear put in proofs of debts for money paid to Ruddock. The
other creditors sought to have these proofs expunged.
C
The court agreed with the other creditors. Although Mrs Bear took no part in the
day-to-day management of the business, she was a partner and could not prove
against the estate of the insolvent debtor in competition with his other creditors.
According to Molesworth J (at 58):
The general principle of the authorities is, that a right to participate in profits
constitutes a partner: and that, notwithstanding stipulation of being dormant
or not liable to losses. But there are cases in which it has been held that the
relative rights and liabilities of the persons dealing so far varied from those
usual between partners, that the general rule should not apply. Many of those
cases regard loans which continue to be such. This matter had nothing like a
loan; it was a purchase for a price never to be repaid. As to what was said of
the grandson, though it may have been the motive for the dealing, no rights
to him formed part of the contract. He got nothing which was not subject to
Mrs Bear’s discretion. She retained all the rights of a dormant partner.
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…
The cases show that the relation of partners is the result of their respective
substantial rights, not of the words employed, and that the result of the
partnership liability from participation of profits cannot be evaded by the
form of conveyance. In subsequent matters Mrs Bear and Mr Ruddock treated
each other as partners, as to his contemplating to sell another fourth and add
another partner, which she was willing to do, but in which they corresponded
on the mutual understanding that her consent was necessary …
With a view to profit
The third limb of the definition confines partnerships to associations formed for
making profit. This can be contrasted with clubs and societies formed for the
promotion of religious, social, educational and recreational activities and which
are not run in order to create profits for the individual members. Lord Linley in Wise
v Perpetual Trustee Co Ltd [1903] AC 139 at 149 stated that:
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Clubs are associations of a peculiar nature. … They are not partnerships;
they are not associations for gain; and the feature which distinguishes them
from other societies is that no member as such becomes liable to pay to the
funds of the society or to any one else any money beyond the subscriptions
required by the rules of the club to be paid so long as he remains a member.
It is upon this fundamental condition, not usually expressed but understood
by everyone, that clubs are formed; and this distinguishing feature has been
often judicially recognised.
The intention to make a profit is said to lie ‘at the very heart’ of the partnership
relationship, being the ‘grand characteristic of every partnership and is the leading
feature of nearly every definition of the term’:20 Bova v Avati [2009] NSWSC 921
at [180].
The ‘gain’ mentioned above is pecuniary gain and refers to the gain made between
accounting periods. Association members, unlike partners, do not expect to gain
monetarily by their membership. They may, however, gain in other ways by, for
example, an improvement in their knowledge or skills, enhanced social status, or
personal satisfaction from participation in the association’s activities. Association
members cannot obtain a distribution of pecuniary gains or profits made by the
association, although associations can make profits in the furtherance of their objects.
‘Profits’ are not defined in the Partnership Act. However, courts have come up with
numerous and flexible definitions: Webb (Commissioner of Taxes for Victoria) v The
Australian Deposit and Mortgage Bank Ltd [1910] HCA 48; (1910) 11 CLR 223; Marra
Developments v B W Rofe Pty Ltd [1977] 2 NSWLR 616 at 628–9.
C
3.21
In QBE Insurance Group Ltd v ASC (1992) 38 SCR 270, Lockhart J had to consider
the meaning of ‘profits’ in the context of the Corporations Law. He stated the
following (at 284):
It is an elusive concept and though discussed in many reported cases has not
been extensively analysed or comprehensively defined. The reason is because
the word is used in different contexts (income tax law is a notable illustration).
20. Banks, see note 6 above, [2-07], p 13.
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There is no single definition of the word ‘profits’ which will fit all cases: Bond
v Barrow Haematite Steele Company [1902] 1 Ch 353 at 366 per Farwell J. In Re
Spanish Prospecting Co Ltd [1911] 1 Ch 92 at 98, Fletcher Moulton LJ said:
ex
is
:
The word ‘profits’ has in my opinion a well-defined legal meaning, and this
meaning coincides with the fundamental conception of profits in general
parlance, although in mercantile phraseology the word may at times bear
meanings indicated by the special context which deviate in some respects
from this fundamental signification. ‘Profits’ implies a comparison between
the state of a business at two specific dates usually separated by an interval
of a year. The fundamental meaning is the amount of gain made by the
business during the year. This can only be ascertained by a comparison of
the assets of the business at the two dates.
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The above passage was cited with approval by Gibbs CJ in Federal Commissioner
of Taxation (Cth) v Slater Holdings Pty Ltd [1984] HCA 78; (1984) 156 CLR 447,
although he qualified his agreement by saying that the passage is not of universal
application. His Honour (at 460) regarded the observations of Fletcher Moulton LJ
as a guide only. See also Bond Corporation Holdings Ltd v Grace Bros Holdings Ltd
(1983) 1 ACLC 1009.
Usually courts adopt a simple balance sheet approach21 in relation to ascertaining
whether there is a partnership ‘profit’. This test involves comparing any change
in value of the assets of the company at two different points in time. Any gain in
value will generally be regarded as a profit.
3.22
According to Ward J in Salib v Gakas; Newport Pacific Pty Ltd v Salib [2010] NSWSC
505 at [230]:
C
The intention to make a profit is said to lie ‘at the very heart’ of the partnership
relationship, being ‘the grand characteristic of every partnership, and … the
leading feature of nearly every definition of the term’ (per Lord Lindley, Mollwo,
March & Co v Court of Wards [1872] Eng R 30; (1872) LR 4 PC 419; 17 ER 495;
Lindley & Banks on Partnership 18th ed, Sweet & Maxwell, 2002, at [2-07]).
That said, the sharing of profits per se does not give rise to a partnership
(whether under the Act s 2(3) or at common law — see Lindley LJ (as his
Lordship then was) in Badeley v Consolidated Bank (1888) 38 Ch D 238), the
sharing of profits is only prima facie evidence of a partnership.
At common law, it was the agreement to share profits and losses which was
said to be the ‘characteristic — if not the essence of a partnership contract’
Lindley & Banks, at [5-25], citing Lord Lindley’s explanation that ‘… persons
engaged in any trade, business, or adventure upon the terms of sharing the
profits and losses arising therefrom, are necessarily to some extent partners
in that trade, business or adventure’. In all cases, however, it is a question of
discerning the parties’ intentions (Re Young: Ex parte Jones [1896] 2 QB 484).
See also Bova v Avati [2009] NSWSC 921 at [190].
3.23
21.
As mentioned earlier in this chapter (see 3.8), it is a question of discerning the
parties’ intentions: Re Young; Ex parte Jones [1896] 2 QB 484. Was the common
This test should be compared with the more accepted methods of profit calculation which focus upon operating revenue less
operating expenses over a period of time. Also, these methods make provision for price level adjustments.
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enterprise one with a view to profit? Illustrative are profit-sharing agreements
between parties. While such agreements may point to the existence of a
partnership, they will not be determinative of the fact. Where there is no written
partnership agreement the relationship between the parties will need to be
examined objectively and this will involve looking at words and conduct.
Another issue is whether there needs to be a requirement for partners to participate
in the sharing of profits before the Partnership Act definition is satisfied.22 It is
stated in Lindley & Banks23 that it would seem that the sharing of profit is ‘no more
than a common incident of the partnership relation rather than of its very essence’.
On this view it does not matter that the partners share in the profits. They will
still be partners nevertheless. However, there is contrary authority on this point:
Pooley v Driver (1876) 5 Ch D 458 at 472; Smith v Anderson (1880) 15 Ch D 247
at 278.24 See also M Young Legal Associates Ltd v Zahid [2006] 1 WLR 2562 and
K Fletcher, ‘Partnership: Principals Who Do Not Share Profits’ (2006) 80 ALJ 815.
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STATUTORY RULES
3.25
The Partnership Act sets out some rules26 which are useful indicators in determining
whether a particular relationship is a partnership relationship. However, it should
be noted that these rules are not solely determinative of the issue. A court will
have regard to all the circumstances in order to arrive at the true substance of
the agreement between the parties. The meaning of the contractual arrangement
is to be determined objectively: Australian Broadcasting Corporation v XIVth
Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549; Ermogenous v Greek
Orthodox Community of SA Inc (2002) 209 CLR 95 at 105; Equuscorp Pty Ltd
v Glengallan Investments Pty Ltd (2004) 211 ALR 101 at [34]; Ryder v Frohlich [2004]
C
3.26
The Partnership Act25 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 given what the parties have agreed among themselves.
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. The parties may, for example, have made express provision to
share profits but not losses; they may have specifically stated that their relationship
is not a partnership relationship; one of the parties may be an ‘employee’ who is
paid a share of the profits; or one of the parties may be a finance provider who is
being repaid out of the profits of the business. In these and in all cases, it will be
a question of construction whether the parties intended to create a partnership
relationship. The Partnership Act is of further assistance in this construction.
22. The Partnership Act does not address this issue. However, the Act does provide that each partner has a right to an equal
share in the profits. See ACT s 29; NSW s 24; NT s 28; Qld s 27; SA s 24; Tas s 29; Vic s 28; WA s 34.
23. Banks, see note 6 above, [2-11], p 15.
24. Baxt, Fletcher & Fridman, see note 1 above, [1.4C].
25. ACT s 6; NSW s 1; NT s 5; Qld s 5; SA s 1; Tas s 6; Vic s 5; WA s 7.
26. ACT s 7; NSW s 2; NT s 6; Qld s 6; SA s 2; Tas s 7; Vic s 6; WA s 8.
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ex
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Recourse will often need to be had to both the express and implied intention of the
parties in order to determine whether a partnership relationship exists. According
to Roper J in Wiltshire v Kuenzli (1946–1947) 63 WN (NSW) 47 at 51:
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:
NSWCA 472 at [82]. In this regard, various factors have been identified as relevant
in cases such as Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales
(Finance) Pty Ltd (1974) 131 CLR 321;27 United Dominions Corporation Ltd v Brian
Pty Ltd [1985] HCA 49; (1985) 157 CLR 1; 60 ALR 74128 and Industrial Equity Ltd
v Lyons (NSWSC, Cohen J, 15 October 1991, unreported). Those factors include
how the policy of the business undertaking or commercial enterprise was to be
determined; whether there was property held jointly or on trust for the parties;
and the contribution made by each of the parties to the responsibility and control
of the undertaking. Other factors such as the source of funds, control of business
and character of the profits received may also have a bearing on the issue. No one
factor is determinative: Bova v Avati [2009] NSWSC 921 at [182]; Salib v Gakas;
Newport Pacific Pty Ltd v Salib [2010] NSWSC 505 at [234].
[I]t having been ascertained that the parties intended to do all the things
which would constitute them partners in law, no effect can be given to
their declared intention not to become partners. Of course, if the facts are
equivocal the expressed intention not to become partners is of the utmost
importance as showing the proper inference to be drawn from the facts, but
if the facts are unequivocal the same expressed intention is meaningless
and useless.
C
This intention will be of paramount significance notwithstanding the parties’ stated
description of their relationship, as the description that the parties themselves
have placed on their relationship is not conclusive: Adams v Newbigging (1888)
13 App Cas 308 at 316; Weiner v Harris [1910] 1 KB 285 at 290; Bova v Avati [2009]
NSWSC 921 at [181]. What is important is the substance of the relationship: Canny
Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974)
131 CLR 321 at 327.29 In Stekel v Ellice [1973] 1 WLR 191, the defendant employed
the plaintiff in his accounting firm in 1967. In October 1968, an agreement was
entered into between the two men with the plaintiff becoming a ‘salaried
partner’ earning a salary. The period of employment was to expire in April 1969.
The capital of the partnership was expressed in the agreement as belonging
to the defendant and the defendant would bear all the losses, except that the
plaintiff would be entitled to his own furniture and to clients introduced by him.
Further, the agreement:
• provided for the keeping of books of account;
• called for full-time service;
• restrained either ‘partner’ from being engaged in other business;
• dealt with the giving of securities on account of the firm;
• provided for notice of dissolution for breach;
27.
Baxt, Fletcher & Fridman, see note 1 above, [1.8C].
28. Baxt, Fletcher & Fridman, see note 1 above, [1.24C].
29. Baxt, Fletcher & Fridman, see note 1 above, [1.8C].
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• gave the defendant rights to the profit, apart from the plaintiff’s salary and
rights to the capital;
• provided that, in the event of the defendant’s death, the practice was to belong
to the plaintiff together with (the defendant’s estate being paid) the capital and
sums for profits and work in progress; and
• contained a provision for resolution of disputes by an independent expert.
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Importantly, the agreement also contemplated that a further agreement would
be entered into before April 1969, under which the plaintiff would become a full
partner. However, that later agreement was never entered into, and the parties
continued after that date as before, until August 1970 when relations broke down
resulting in the plaintiff leaving the business and taking his clients with him. The
plaintiff then claimed a declaration that the ‘partnership’ was dissolved and an
order that it be wound up.
The question was whether the arrangement between the parties constituted an
agreement for employment or an agreement for partnership. The court found
that there was a partnership for a fixed term and that this continued without any
express new agreement.
According to Megarry J (at 198–9):
The term ‘salaried partner’ is … to some extent … a contradiction in terms.
However, it is a convenient expression which is widely used to denote
a person who is held out to the world as being a partner, with his name
appearing as partner on the notepaper of the firm and so on. At the same
time, he receives a salary as remuneration, rather than a share of the profits,
though he may, in addition to his salary, receive some bonus or other sum
of money dependent upon the profits. Quoad the outside world it often
will matter little whether a man is a full partner or a salaried partner; for a
salaried partner is held out as being a partner, and the partners will be liable
for his acts accordingly. But within the partnership it may be important to
know whether a salaried partner is truly to be classified as a mere employee,
or as a partner.
…
What must be done … is to look at the substance of the relationship between
the parties.
C
In his Honour’s opinion, the relationship between the parties satisfied the
definition of a partnership contained in the Partnership Act. The fact that there
was no sharing of profits did not mean that this negatived other evidence of a
partnership. Further, the conduct of the parties indicated a partnership which was
determined in August 1970.
The Partnership Act gives some assistance in determining whether a partnership
exists. This assistance is contained in the following rules of construction which are
set out in the legislation.30
30. ACT s 7; NSW s 2; NT s 6; Qld s 6; SA s 2; Tas s 7; Vic s 6; WA s 8.
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Rule 1: Co-ownership
3.28
The Partnership Act31 provides as follows:
Joint tenancy, tenancy in common, joint property, or part ownership does not
of itself create a partnership as to anything so held or owned, whether the
tenants or owners do or do not share any profits made by the use thereof.
3.29
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This subsection makes it clear that holding property jointly as co-owners will not
of itself create a partnership. In Davis v Davis [1894] 1 Ch 393, the court inferred
a partnership relationship in circumstances where two brothers held real estate
as tenants in common. In that case, the brothers’ father had left his business
and three houses to his sons as joint owners. One of the houses had been let to
tenants and the other two houses were used in the business which was carried
on by the two brothers. The brothers borrowed money on the security of the
houses and drew identical weekly expenses from the business. In finding that
the brothers were in partnership in relation to the carrying on of the business, the
court held that the houses were partnership property: see also French v Styring
(1857) 140 ER 455.
In Lindley & Banks,32 it is suggested that it is not necessary that there be jointly
owned or partnership property for there to be a partnership; however, the authors
of Lindley & Banks33 suggest that in cases where one person owns property and
the other possesses a particular skill and they agree that the latter should have
control of the property for their mutual benefit and that they should divide the
profits derived from its employment between themselves, it may be no easy task
to identify whether or not a partnership has been created. In those cases, it is said
that ‘everything will depend on the terms of the parties’ agreement and on their
underlying intention’: Walker v Hirsch (1884) 27 Ch D 460; Salib v Gakas; Newport
Pacific Pty Ltd v Salib [2010] NSWSC 505 at [257].
Rule 2: Sharing of gross returns
3.30
The Partnership Act34 provides:
The sharing of gross returns does not of itself create a partnership, whether
the persons sharing such returns have or have not a joint or common right
or interest in any property from which or from the use of which the returns
are derived.
C
Therefore, by itself, the sharing of gross profit will not be enough to create a
partnership. In Cribb v Korn (1911) 12 CLR 205; [1911] HCA 9,35 Korn was employed as a
rural worker by a landowner. The landowner entered into an agreement with Cribb
under which the landowner had the exclusive use and occupation of a certain area
of Cribb’s land. As part of the agreement, Cribb would provide machinery and stock
and the landowner would pay Cribb half of the proceeds of sale of the produce of
the land and stock, whenever this occurred.
31.
ACT s 7(1); NSW s 2(1); NT s 5(1)(a); Qld s 6(1); SA s 2(I); Tas s 7(a); Vic s 6(1); WA s 8(1).
32. Banks, see note 6 above, [5-07], p 81.
33. Banks, see note 6 above, [5-27], p 88.
34. ACT s 7(2); NSW s 2(2); NT s 5(1)(b); Qld s 6(2); SA s 2(II); Tas s 7(b); Vic s 6(2); WA s 8(2).
35. Baxt, Fletcher & Fridman, see note 1 above, [1.15C].
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Korn was injured while working and claimed workers’ compensation from Cribb on
the basis that Cribb and the landowner were partners.
The High Court held that there was no partnership; it was a mere tenancy. As the
landowner had the exclusive right to occupy the land and Cribb had no right to
direct or control the landowner’s working of the land, there could be no partnership
but merely a tenancy. Further, the sharing of gross returns was not enough to
establish a partnership, but merely constituted rent.
According to Barton J (at 216):
3.31
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To be partners, they must be shown to have agreed to carry on some business
— in this case the business of farming — in common with a view of making
profits and afterwards of dividing, or of applying them to some agreed object.
There is nothing to show that the appellant intended to engage in farming at
all, or to be concerned in the transaction beyond his right to compensation.
Generally, what is required is more than an agreement to share gross profits.
If there is a sharing of both profits and losses by persons engaged in any trade,
business or adventure, then those persons are necessarily to some extent
partners in that trade, business or adventure. According to Lindley & Banks,36
subject to exceptional cases, persons who agree to share profits and losses will
normally find themselves treated as partners. However, the agreement to share
losses must generally extend also to the making good of losses although it is
not necessary that profits be split 50:50 for there to be a partnership. The fact
that the division of profits was an unequal one would not preclude there being
a partnership. However, an arrangement for the receipt of a share of profits and
losses where there is no general obligation to make good the losses may mean
there is no partnership: see Lindley & Banks.37
Rule 3: Profit and loss sharing
3.32
The Partnership Act38 provides:
The receipt by a person of a share of the profits of a business is prima facie
evidence that he is a partner in the business, but the receipt of such a share,
or of a payment contingent on, or varying with the profits of a business, does
not of itself make him a partner in the business …
C
The word ‘profit’ is not defined in the Act. According to Fletcher Moulton LJ in
Re Spanish Prospecting Co Ltd [1908–10] All ER Rep 573 at 576, the word ‘profit’:
… implies a comparison between the state of a business at two specific
dates usually separated by an interval of a year. The fundamental meaning
is the amount of gain made by the business during the year. This can only be
ascertained by a comparison of the assets of the business at the two dates.
For practical purposes these assets in calculating profits must be valued, not
merely enumerated … We start, therefore, with this fundamental definition
of profits, namely, if the total assets of the business at the two dates be
compared, the increase which they show at the later date as compared
36. Banks, see note 6 above, [5-23], p 91.
37
Banks, see note 6 above, [5-24], p 91.
38. ACT s 7(3); NSW s 2(3); NT s 5(1)(c); Qld s 6(3); SA s 2(III); Tas s 7(c); Vic s 6(3); WA s 8(3).
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with the earlier date (due allowance, of course, being made for any capital
introduced into or taken out of the business in the meanwhile) represents in
strictness the profits of the business during the period in question …
The difficulty in the interpretation of the state and territory legislation where Rule 3
is to be found, lies in its use of the expression ‘prima facie’ to qualify evidence.
It would seem that the fact of a profit-sharing scheme is admissible in evidence
as to the existence of a partnership, but that fact by itself is not enough to draw
the inference that there was a partnership: Television Broadcasters Ltd v Ashton’s
Nominees Pty Ltd (No 1) (1979) 22 SASR 552.
In Cox v Hickman (1860) 8 HL Cas 268; 11 ER 431, B and J Smith traded in partnership
under the name ‘Stanton Iron Company’ and encountered financial difficulties.
A deed of arrangement with creditors was entered into, whereby their business
and partnership property was assigned to trustees. The trustees were empowered
to carry on the business under a new name and future income was to be divided
rateably between all the creditors. As part of the arrangement, it was provided
that, if the creditors were paid off, the business was to be returned to the Smiths.
Cox and Wheatcroft were two of the creditors who were appointed as trustees;
however, Cox never acted as a trustee, and Wheatcroft did so only for a very short
time. After Wheatcroft had ceased to act, the remaining trustees incurred debts to
Hickman, and they gave him certain bills of exchange drawn on the partnership.
Hickman sought to make both Cox and Wheatcroft liable on these bills.
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3.33
The court held that there had been no holding out of Cox and Wheatcroft as
partners and Hickman had no knowledge of them as partners or of the deed of
arrangement. Both Cox and Wheatcroft could deny liability notwithstanding that
they, as creditors, were entitled to share rateably in the profits. This was not enough
to make them partners. According to Pollock LCB (at (HL Cas) 301; (ER) 445):
… this arrangement to apply future profits (if any) in payment of the old debts,
the creditors being willing to give up their right to be paid out of capital and to
take the chance of any profits, appears to me not to constitute a partnership
as to third parties, who know nothing of the deed …
C
Further, according to Wightman J (at (HL Cas) 296; (ER) 443):
It is said that a person who shares in net profits is a partner; that may be so
in some cases, but not in all; and it may be material to consider in what sense
the words, ‘sharing in the profits’ are used. In the present case, I greatly doubt
whether the creditor, who merely obtains payment of a debt incurred in the
business by being paid the exact amount of his debt, and no more, out of the
profits of the business, can be said to share the profits. If in the present case,
the property of the Smiths had been assigned to the trustees to carry on the
business, and divide the net profits, not amongst those creditors who signed
the deed, but amongst all the creditors, until their debts were paid, would a
creditor, by receiving from time to time a rateable proportion out of the net
profits, become a partner? I should think not.
This, then, is the general rule. The Partnership Act39 also provides five cases,
discussed below, where this presumption does not arise.
39. ACT s 7(4)(a)–(e); NSW s 2(3)(a)–(e); NT s 5(1)(c)(i)–(v); Qld s 6(3)(a)–(e); SA s 2(III)(a)–(e); Tas s 7(c)(i)–(v); Vic s 6(3)(a)–(e);
WA s 8(3)(a)–(e).
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Instances in which presumption of existence of partnership
does not arise
3.34
Case no 1: Receipt by a person of a debt or other liquidated demand by instalments
or otherwise out of the accruing profits of a business does not of itself make him
or her a partner in the business or liable as such.
N
Case no 2: A contract for the remuneration of a servant or agent of a person
engaged in a business by a share of the profits of the business does not of itself
make the servant or agent a partner in the business or liable as such.
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ex
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:
This rule embodies the decision in Cox v Hickman (1860) 8 HL Cas 268; 11 ER 431.
However, if there are circumstances showing that the relationship is in fact a
partnership, the lender may be regarded as a partner regardless of the stated
intentions of the parties: Re Ruddock (1879) 5 VLR 51 (IP & M) 51 at [3.5]; compare
Moore v Slater (1863) 2 W & W (L) 161, a case concerning an absolute assignment
of a debtor’s business coupled with the ability of the assignee to dispose of the
business for their own benefit.
In Walker v Hirsch (1884) 27 Ch D 460, Walker had been a clerk to the defendant’s
firm when he and the firm’s proprietors entered into an agreement for Walker
to be paid a fixed salary in addition to the right to participate in one-eighth of
the profits and losses. Walker further agreed to deposit £1500 in the business
while the agreement continued, receiving 5 per cent per annum interest. The
firm’s name was not altered, nor was Walker mentioned in firm circulars or bills.
Furthermore, Walker was not introduced to customers as a partner, did not sign
bills of exchange, and signed letters and receipts ‘Walker for [the firm]’.
In 1884, the defendant gave him notice and excluded him from the office. Walker
sought to wind up the business, sought an injunction restraining dealings with the
business’s assets, and sought the appointment of a receiver and manager. The
trial judge refused the injunction and appointment of a receiver and ordered
the defendant to pay the £1500 into court.
The trial judge, Lindley LJ, focused upon Walker’s lack of ability to control the
defendant in the management of the business. Walker was regarded as a servant
‘not in the position of a partner having an equal voice or control in the management
of the concern’. Therefore the injunction was refused.
C
Similarly, in Beckingham v Port Jackson & Manly Steamship Co (1957) SR (NSW)
403,40 a syndicate of nine persons had been formed to purchase and renovate
a submarine and then to exhibit the submarine to members of the public for a
fee. In order to achieve this objective, the syndicate members entered into an
arrangement in 1946 with the Port Jackson and Manly Steamship Company
(the ‘steamship company’), whereby the submarine could be moored at a wharf.
The syndicate members purchased the submarine and it was moored adjacent to
the steamship company’s wharf at Manly Cove. While the submarine was being
moored a storm broke out and the submarine, the steamship company argued,
became a danger to the wharf and was at risk of being stranded. The steamship
company thereupon engaged the Waratah Tug and Salvage Co Pty Ltd (the ‘tug
40. Baxt, Fletcher & Fridman, see note 1 above, [1.13C].
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company’), to take the submarine into more open waters — to protect it and the
wharf. While it was being towed, it was wrecked.
Beckingham and the other plaintiffs were the surviving members and personal
representatives of the nine syndicate members. They brought legal proceedings to
recover damages for losses on the basis of trespass and negligence in connection
with the mooring and towing of the submarine.
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An issue which had to be determined was, who was to be responsible for the
loss sustained as a result of the destruction of the submarine? If the members
of the syndicate and the steamship company were partners, then the steamship
company would not be liable for the loss. The members of the syndicate argued
that the arrangement entered into was one of lessee and lessor, whereby the
syndicate leased the wharf from the steamship company; alternatively, the
arrangement was one of principal and agent, with the steamship company being
appointed as agent of the syndicate for the purpose of managing the submarine.
In contrast to these two arguments, the steamship company argued that the
relationship was a partnership.
In determining this issue, the court examined the agreement between the parties.
It was noted by the court that the agreement provided:
• that the submarine was to be kept near the steamship company’s wharf in
Manly Cove for a fee of £400 per annum;
• for the appointment of the steamship company as managers to the submarine
exhibit for three to five years on a commission of 40 per cent of the admission
fees less some costs;
• for profit to be shared on a 60:40 basis in favour of the syndicate;
• that work to be done on the submarine was to be arranged by the steamship
company but paid for by the syndicate;
• that ‘ownership and possession’ of the submarine was to remain with the
syndicate;
• that the steamship company was to undertake general management and be
the sole judge of who was to be allowed access to the submarine;
• that the steamship company was acting ‘as agent for the syndicate’;
• for the steamship company to be exempted from liability to third parties; and
C
• for either party to terminate by notice after three years — in such cases, the cost
of removal of the submarine was to be borne by the syndicate.
In these circumstances, the Supreme Court of New South Wales held that there
was no partnership between the steamship company and the syndicate. The
steamship company was an independent contractor and therefore potentially
liable for negligence. The court referred to Lord Halsbury’s remarks in Adam
v Newbigging (1888) 13 App Cas 308 at 315, where his Lordship stated:
If a partnership in fact exists, a community of interest in the adventure being
carried on in fact, no concealment of name, no verbal equivalent for the
ordinary phrases of profit and loss, no indirect expedient for enforcing control
over the adventure will prevent the substance and reality of the transaction
being adjudged a partnership … And no ‘phrasing of it’ by dexterous draftsmen
… will … avert the legal consequences of the contract.
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3.36
Case no 3: A person being the widow or child of a deceased partner, and receiving
by way of annuity a portion of the profits made in the business in which the
deceased person was a partner, is not by reason only of such receipt a partner in
the business or liable as such.
3.37
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In Commissioners of Inland Revenue v Lebus [1946] 1 All ER 476, the Commissioners
attempted to recover income tax on the amounts which were due under a will
to a widow of a partner. The court found that a beneficiary under a will would
only have to pay tax on the amounts which were paid to her during the years of
assessment. The widow did not have to pay tax on a share of the profits earned
by the business. This decision can be compared with Federal Commissioner of
Taxation v Whiting (1943) 68 CLR 199, where it was held that a beneficiary of a
deceased partner’s estate is not taxable on income earned from the partnership
unless the beneficiary has a present right to have the income paid to him or her
by the trustees.
Case no 4: The advance of money by way of loan to a person engaged in or about to
engage in any business or a contract with that person, that the lender shall receive
a rate of interest varying with the profits, or shall receive a share of the profits
arising from carrying on the business, does not of itself make the lender a partner
with the person or persons carrying on the business or liable as such; provided
that the contract is in writing and signed by or on behalf of all the parties thereto.
This provision protects a creditor who has advanced money in return for a share
of the profits. The creditor, if the section is satisfied, will not be regarded as a
partner. In Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511,41 Delhasse agreed
to advance money to two others. Conditions of the advance referred to the
equivalent of this subsection of the Partnership Act and stressed that the advance
was a loan only and did not make the lender a partner. However, provision was
made for Delhasse to share in the profits, have a right to inspect the accounts,
and the option of dissolving the partnership in specified circumstances. Further,
the advance was not to be repayable until after dissolution and it represented all
the business capital.
C
The Court of Appeal held that this arrangement constituted a partnership.
According to James LJ (at 526):
If ever there was a case of partnership this is it. There is every element of
partnership in it. There is the right to control the property, the right to receive
profits, and the liability to share in losses.
But it is said that there are other provisions in the contract which prevent
its having this operation, and which show clearly that the parties meant the
relation of lender and borrower, and not the relation of partners, to subsist
between them. And for this purpose reliance is placed on the recital of … the
agreement for a loan … and the declaration … that the ‘advance does not and
shall not be considered to render Delhasse a partner in the business’. Can
those words really control the rest of the agreement? Do they really show
that the intention was not in truth that which it appears to be by all the other
stipulations? To my mind it is clear that they do not. When you come to look
at all the other stipulations, they are utterly inconsistent with the notion of a
41.
Baxt, Fletcher & Fridman, see note 1 above, [1.13C].
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loan by the one to the two, so as to make the two personally liable in respect
of it in any event or under any circumstances whatever. The loan is said to be
made to the two, but, when you read the whole of the agreement together, it
is impossible not to see that it was not a loan to the two upon their personal
responsibility by the person who is said to be the lender but that it was a loan
to the business which was carried on by the two for the benefit of themselves
and him, and was to be repaid out of the business, and out of the business
only, except in the case of loss, when the loss would have to be borne by the
three in the proportions mentioned in the agreement. The use of the word
‘lend’, and the reference to the Act, are, in my opinion, mere sham — a mere
contrivance to evade the law of partnership.
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In Badeley v Consolidated Bank (1888) 38 Ch D 238, a lender (plaintiff) advanced
money to a borrower and took security over certain plant owned by the borrower.
Further, the lender was to receive interest and a share of the net profits. The
borrower agreed to apply the loan moneys to the carrying out of work associated
with his business and the lender had a right to enter the property if the borrower
became bankrupt.
The Court of Appeal stressed the need to ascertain the ‘real agreement’ between
the parties. Sharing of profit is not enough, the court said, to infer a partnership.
The formal document signed by the parties expressed the real truth, namely, that
this was a contract of loan upon security. There was no participation in loss on the
part of the lender. This made it different from Delhasse.
3.38
Case no 5: A person receiving by way of annuity or otherwise a portion of the
profits of a business in consideration of the sale by him or her of the goodwill of
the business is not by reason only of such receipt a partner in the business or
liable as such.
Where a person sells a business and then continues to receive an annuity based
upon a percentage of the profits, he or she will not for that reason alone be
regarded as a partner to the purchaser. The courts will look at the agreement.
C
In Hawksley v Outram [1892] 3 Ch 359, four people carried on business in
partnership. They entered into an agreement to sell this business to Hawksley. The
agreement was signed by one partner on his own behalf and also as attorney for
another, and it provided that Hawksley was to undertake to discharge the existing
debts of the business and that, if the debts did not exceed a certain amount,
the vendors were to be entitled to a share of the profits. The power of attorney
under which one partner had signed the agreement on behalf of another did not
empower him to enter into a partnership agreement.
Hawksley brought an action for specific performance of the agreement, and it was
argued that the arrangements constituted a partnership agreement between the
four original partners and Hawksley. The court disagreed.
According to Lord Linley (at 371):
It has been contended that this is an agreement for a partnership; but it is
nothing of the sort. It is evidently nothing more or less than an agreement
for the sale of the property and the business as a going concern for a sum
of money a portion of which is undetermined and has to be ascertained, and
which portion until paid is to carry a share of the profits.
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CREATION OF A PARTNERSHIP
3.39
There are no special requirements for the creation of a partnership. It can be
created verbally or by writing, the latter being by deed or by simple agreement.
Further, partnership can be inferred from the conduct of the respective parties.
N
Partnership is a branch of agency law and is characterised by a mutuality of
rights and obligations. Each partner is agent and principal of the others and owes
fiduciary obligations to the others. Partners can bind each other and be bound by
the actions of their partners. The question is, when will the acts of a partner bind
the other partners? To answer this question regard must be had to the Partnership
Act and to the general law of agency.
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3.40
ex
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RELATIONSHIP OF PARTNERS TO OUTSIDERS
:
If the partnership is to carry on business under a name then this will need to
be registered under the Business Names Registration Act 2011 (Cth). The same
restrictions upon the availability of names that apply to sole traders and companies
apply to partnerships.
The Partnership Act
3.41
The Partnership Act42 states that:
Every partner in a partnership other than a firm that is a limited partnership
or incorporated limited partnership is an agent of the firm and of the other
partners for the purpose of the business of the partnership; and the acts of
every partner who does any act for carrying on in the usual way business
of the kind carried on by the firm of which the partner is a member, binds
the firm and the other partners, unless the partner so acting has in fact no
authority to act for the firm in the particular matter, and the person with
whom the partner is dealing either knows that the partner has no authority,
or does not know or believe the partner to be a partner.
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Partnership is a branch of agency law. However, one significant difference with
partnership law43 is that partners are both principal and agent and therefore there
are two-way fiduciary duties. Because partners owe each other fiduciary duties,
when one partner acts as the firm’s agent he or she will owe duties to his or
her partners and the other partners will owe similar duties back to that partner:
Phillips-Higgins v Harper [1954] 1 QB 411.
The basis of the fiduciary relationship of partners was explained by James LJ in
Re Agricultural Insurance Co (Baird’s case) (1870) LR 5 Ch App 725 at 733, in the
following way:
Ordinary partnerships are essentially, in kind, and not merely in the magnitude
of the partnership or in the number of the partners, different from joint stock
companies.
42. ACT s 9; NSW s 5; NT s 9; Qld s 8; SA s 5; Tas s 10; Vic s 9; WA s 26.
43. See International Harvester Co (Aust) Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 at 652.
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N
Partners may be bound to a party who is not a partner (an outsider) in the following
situations:
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ex
is
:
Ordinary partnerships are by the law assumed and presumed to be based on
the mutual trust and confidence of each partner in the skill, knowledge and
integrity of every other partner. As between the partners and the outside
world (whatever may be their private arrangements between themselves),
each partner is the unlimited agent of every other in every matter connected
with the partnership business, or which he represents as partnership
business, and not being in its nature beyond the scope of the partnership.
A partner who may not have a farthing of capital left may take moneys or
assets of this partnership to the value of millions, may bind the partnership
by contracts to any amount, may give the partnership acceptances for any
amount, and may even — as has been shewn in many painful instances in this
Court — involve his innocent partners in unlimited amounts for frauds which
he has craftily concealed from them.
• when the partners have authorised a person, whether or not a partner, to enter
into a transaction on their behalf with the outsider. In such cases, the normal
rules of agency apply so that if the agent has acted in entering into a transaction
within his or her actual or apparent authority,44 the partners will be bound to the
transaction;
• when the partners have authorised one of their partners to act on behalf of the
partnership with an outsider. In these circumstances, all the partners will be
bound by the authorised act of their fellow partner/agent. It does not matter
whether the transaction was within the scope of the partnership business or
whether the outsider was aware that the agent was a partner in the business.
The key to the partners being bound in this situation is the fact that the
transaction was authorised by all the partners;
• when one of the partners has acted, without express authorisation, in
circumstances where four requirements which are set out in the Partnership
Act45 have been satisfied. In this situation, the fact of being a partner confers
authority to bind the partnership. This will be so as long as the following four
requirements are satisfied:
1. the act or transaction was entered into by a partner;
C
2. the act or transaction entered into must be within the scope of the kind of
business carried on by the firm;
3. the act or transaction must be effected in the usual way; and
4. the other party to the transaction must either know or believe that the person
acting is a partner or must not know of his or her lack of authority to act.
Each of these requirements will now be examined.
44. As is discussed in Chapter 9, authority can be conferred in a number of ways. It may be expressly conferred or it may arise by
implication. In relation to how authority may arise by implication, this may arise as a result of the appointment of the person
as an agent, by partners acquiescing in the agent assuming a particular status or office (see Hely-Hutchinson v Brayhead
Ltd [1968] I QB 549 and Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480) or as a consequence
of the agent performing some other task which they have actual authority to carry out: see Australia & New Zealand Bank
Ltd v Ateliers de Constructions Electriques de Charleroi (1966) 39 ALJR 414; [1967] 1 AC 86 (PC).
45. ACT s 9; NSW s 5; NT s 9; Qld s 8; SA s 5; Tas s 10; Vic s 9; WA s 26.
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The act or transaction was entered into by a partner
3.43
Under the Partnership Act,46 partners will only be bound to a transaction made
with an outsider when that transaction was made by one or more of their partners.
If the transaction was not made by a partner, the other partners cannot be liable
under this section of the Partnership Act and the situation would then have to be
analysed in accordance with normal agency rules.
The act or transaction entered into must be within the scope
of the kind of business carried on by the firm
Whether an act or transaction is within the scope of the kind of business that is
carried on by the firm is a question of fact: Shannon v Whiting (1901) 7 ALR 49;
(1900) 22 ALT 188. In this regard, it should be remembered that businesses may
change what they do over time. This is particularly so with respect to trades
and professions.
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3.44
In Polkinghorne v Holland (1934) 51 CLR 143,47 Mrs Polkinghorne was a client of a
firm of solicitors comprising three individuals in partnership. She received advice
from one of these partners (Harold Holland) about an investment in which the
partner was financially interested. The investment proved to be a failure and
Mrs Polkinghorne incurred heavy losses for which she brought an action claiming
damages. The main issue was whether the two innocent partners were liable for
her loss.
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The High Court, in finding them liable to account to Mrs Polkinghorne, made a
number of important observations. According to Rich, Dixon, Evatt and McTiernan JJ
(at 156–7):
The difficulty of the case really lies in determining what is within the course of
a solicitor’s business. By associating themselves in a partnership with Harold
Holland, the respondents made themselves responsible, as principals are for
an agent, for all his acts done in the course of his authority as a partner.
That authority was to do on behalf of the firm all things that it is part of the
business of a solicitor to do. If, in assuming to do what is within the course
of that business, he is guilty of a wrongful act or default, his partners are
responsible, notwithstanding that it is done fraudulently and for his own
benefit: Lloyd v Grace, Smith & Co [1912] AC 716. But, to make his co-partners
answerable, it is not enough that a partner utilises information obtained
in the course of his duties, or relies upon the personal confidence won or
influence obtained in doing the firm’s business. Something actually done in
the course of his duties must be the occasion of the wrongful act.
Their Honours went on to say (at 158–9) that the giving of financial or investment
advice was within the usual course of business of that firm of solicitors:
But it is one thing to say that a valuation or expression of his own judgment
upon a commercial or financial question is not within the scope of a solicitor’s
duties, and another to say that when he is consulted upon the wisdom of
investing in the shares of a company of which his client knows nothing, it is
outside his province as a solicitor to inquire into the matter and to furnish
46. ACT s 9; NSW s 5; NT s 9; Qld s 8; SA s 5; Tas s 10; Vic s 9; WA s 26.
47.
Baxt, Fletcher & Fridman, see note 1 above, [1.33C].
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his client with the information and assistance which the facts upon the
register will give, to point out what inquiries may be made, and, if required, to
undertake them or invoke the aid of those who will.
It should also be noted that firms may be liable to a transaction entered into by
a partner notwithstanding that the firm does not enter into transactions of that
type. This will be so where the transaction is of a kind that is usually entered into
by other firms in the same industry: see Mercantile Credit Co Ltd v Garrod [1962]
3 All ER 1103.48
3.46
In respect to trading partnerships, courts have been more willing to specify certain
acts which are regarded as being within the usual authority of partners. In Bank
of Australasia v Breillat (1847) 6 Moo PC 152; 13 ER 642, the Privy Council stated
(at (Moo PC) 193–4; (ER) 657–8):
ex
is
:
3.45
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Every partner is, in contemplation of law, the general and accredited agent of
the partnership; or, as it is sometimes expressed, each partner is praepositus
negotias societatis; and consequently may bind all the other partners by
his acts, in all matters which are within the scope and objects. Hence if the
partnership is of a general commercial nature, he may pledge or sell the
partnership property; he may buy goods on account of the partnership; he may
borrow money, contract debts, and pay debts on account of the partnership;
he may draw, make, sign, indorse, accept, transfer, negotiate, and procure
to be discounted, promissory notes, bills of exchange, checks [sic] and other
negotiable paper, in the name of and on account of the partnership.
These powers are in the main embodied in s 27 of the Western Australian
Partnership Act;49 however, they are not mentioned in any of the other state or
territory Acts.
The act or transaction must be effected in the usual way
Notwithstanding that a partner has entered into a transaction which is within the
scope of the kind of business carried on by the partnership, the transaction will
not be binding if it is carried out in an unusual way. The reasoning for this is that
the outsider is put on notice that the partner with whom they are dealing may
lack the requisite authority to bind the other partners. Further, for the act to be
usual in the business of the firm, it must be reasonably necessary and not merely
convenient for the carrying out of that type of business. In Union Bank of Australia
v Fisher (1893) 14 LR (NSW) Eq 241, it was held that the handing over of original
documents to a solicitor, although convenient, was not a usual practice.
C
3.47
In ascertaining whether the partner’s action was ‘carried out in the usual way’,
the courts will look at the particular business and at other people’s actions in
48. Baxt, Fletcher & Fridman, see note 1 above, [1.33C].
49. This section provides that, subject to s 26, every member of a partnership carrying on business of a kind in which any of the
following acts is usually done, may bind the firm by the same, respectively:
(a) He may draw, accept, indorse, make, and issue bills and negotiable instruments in the name of the firm.
(b) He may borrow money on the credit of the firm.
(c) He may, for the purpose of such borrowing, or of securing an existing debt, pledge any goods or personal chattels
belonging to the firm.
(d) He may, for the like purposes, make an equitable mortgage by deposit of deeds or otherwise of real estate or chattels
real belonging to the firm.
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similar businesses. In Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103,50
two people were in a partnership in a business which leased out garages. In their
partnership agreement, both were prohibited from selling motor vehicles. Despite
this prohibition, one partner, Parkin, sold to the plaintiff a motor vehicle which he
did not own — in fact, he had sold other vehicles to the plaintiff in the past. The
plaintiff sued the partnership and recovered damages. The court looked at the
transaction as it would have appeared to the plaintiff and concluded that from the
plaintiff’s point of view the sale was in the usual course of business.
According to Mocatta J (at 1106):
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… counsel for the plaintiffs says that the question in this case is whether the
act of Mr Parkin in entering into the sale to the plaintiffs of this Mercedes
Benz on behalf of the Hamilton Garages partnership, as part and parcel of a
hire-purchase transaction, was doing an act for carrying on in the usual way
business of a kind carried on by the firm of which he was a member. If it was
such an act, counsel for the plaintiffs submits that the section makes it clear
and enacts that his act binds the firm and his partner, to wit, the defendant.
His Honour went on to say that when Parkin entered into the sale of the Mercedes
Benz to the plaintiff, ‘he was doing an act of a like kind to the business carried on
by persons trading as a garage’.
His Honour further held (at 1107) that:
[W]hatever express restrictions there might earlier have been on Mr Parkin’s
authority, the defendant had known since April, 1960, that Mr Parkin had been
selling cars in the firm’s name and that he intended to continue doing so, and
following Rapp v Latham (1819) 2 B & Ald 795, that the defendant, having taken
no steps to prevent such sales, was liable for his partner’s actions. Although
it was not strictly necessary to determine what express restrictions there
had originally been as to the sale of cars, the evidence strongly suggested
that, if the defendant did not actually know before April 1960, that Mr Parkin
was selling cars in the firm’s name, he left the conduct of the business to
Mr Parkin and did not really mind what he did so long as it was honest.
Thus, even if the action by the partner is within the scope of the business carried
on by the firm, if it is carried on in an unusual manner the other partners may not
be bound. Another illustration is Goldberg v Jenkins (1889) 15 VLR 36.51 In that case,
a partner purported to borrow money on behalf of the firm at over 60 per cent
interest when at the time the comparable rates were between 6 per cent and
10 per cent. It was held that such borrowing was beyond ‘the usual way’ of the
firm and thus the firm was not bound to the transaction. According to Hodges J
(at 38–9):
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3.48
A person conducting his transactions in the ordinary way in the year 1888
would have been able to obtain all the advances which he could reasonably
require at rates varying from 6 to 10 per cent; but in this case, referring to
the last transaction, the interest was something over 60 per cent and the
person lending money on those terms knows that the person borrowing
50. Baxt, Fletcher & Fridman, see note 1 above, [1.33C].
51.
Baxt, Fletcher & Fridman, see note 1 above, [1.34C].
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is not conducting an ordinary business transaction, and that, therefore the
partner borrowing would have no power to bind his co-partners.
Similarly, in Higgins v Beauchamp [1914] 3 KB 1192, it was held that acceptance
by a partner on behalf of his firm of a bill of exchange which did not contain the
drawer’s name was not in the usual way of carrying on business. This was despite
the fact that it was acknowledged that a partner had authority to accept bills of
exchange on behalf of a partnership.
The other party to the transaction must either know or
believe that the person acting is a partner or must not
know of his or her lack of authority to act
ex
is
:
Where a partner enters a transaction with an outsider without the authority of his
or her co-partners, and that transaction is within the scope of the kind of business
carried on by the firm and it is entered in the usual way, it may nevertheless not be
binding on the partners if the outsider knows of the lack of authority or does not
know or believe that the partner with whom they acted was a partner.
3.50
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3.49
Difficulties with this rule arise where the outsider is not aware of the partner’s
lack of authority. In such cases, the Partnership Act makes it clear that in order
for liability to be avoided by the remaining partners it would need to be shown
that the outsider did not know or believe at the time of the transaction that the
person with whom they dealt was a partner. This position can be contrasted with
general agency law. Under the rules of agency, knowledge by an outsider that
they are dealing with an agent is not relevant in determining the liability of the
principal. This was illustrated in Watteau v Fenwick [1893] 1 QB 346. In that case,
the defendants owned a hotel: the Victoria Hotel, Stockton-upon-Tees. This hotel
was managed by a person named Humble. Humble’s name was over the hotel
door and the hotel licence was in his name. The plaintiffs sold cigars on credit to
Humble at the hotel despite the fact that the defendants had forbidden him to buy
cigars on credit. The cigars, however, were such as would be usually supplied and
dealt in at such an establishment. The cigars were not paid for and the plaintiffs
sued the defendants for the price of the cigars. It was held that the defendants
were liable.
C
According to Wills J (at 348–9):
[O]nce it is established that the defendant was the real principal, the ordinary
doctrine as to principal and agent applies — that the principal is liable for all
the acts of the agent which are within the authority usually confided to an
agent of that character, notwithstanding limitations, as between the principal
and the agent, put upon that authority.
Thus it would appear that despite the fact that the plaintiffs had supplied Humble
in the belief that he owned the hotel, the defendants were liable.
If, however, we attach importance to the state of mind of the outsider in relation
to the capacity of the person with whom they dealt — that is, whether or not the
outsider believed or knew the person was a partner — it is quite possible that in a
partnership situation the partners who were not involved in the transaction could
escape liability simply by showing that the outsider did not know or believe that
the person with whom they dealt was a partner. Applying this situation to the facts
of Watteau v Fenwick would produce a different result.
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The High Court examined this statutory position in Construction Engineering
(Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541.52 In that case, a company called
Tambel (Australasia) Pty Ltd (Tambel) entered into a partnership agreement with
Hexyl Pty Ltd (Hexyl) for the construction and operation of home units on land
at Edgecliff owned by Tambel. The effect of this partnership agreement was that
Tambel would enter into a contract for the construction of this building in its own
name as principal. Some months later, Tambel entered into a building contract
with Construction Engineering Pty Ltd (Construction Engineering). At the time of
this agreement, Construction Engineering did not know of the existence of the
partnership, nor did it believe that Tambel was a partner with Hexyl. A dispute arose
as to Construction Engineering’s entitlement to payment and it was argued, inter
alia, that the contract made by Tambel had been made on behalf of a partnership
between Tambel and Hexyl as principals.
ex
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:
3.51
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The High Court unanimously held that Hexyl was not a party to the building
contract. In examining the section in the New South Wales Partnership Act, their
Honours said (at 547) that the section has two distinct limbs:
The first deals with actual authority. It provides not that every partner is
deemed to be an agent of the firm and his other partners for the purposes of
the partnership business but that every partner is an agent of the firm and
his other partners for that purpose. The actual authority to which it refers is,
however, but prima facie in that it may be negated or qualified by contrary
agreement of the partners.53
Applying this to the facts, the court found that Construction Engineering could not
rely upon this limb of the section. The court held that any prima facie authority of
Tambel to enter into the building agreement as agent for Hexyl as an undisclosed
principal or otherwise was negated by the partnership deed.
According to the court (at 547):
The second limb of sec 5 deals with ostensible authority. Even though actual
authority may be lacking, the act of every partner who does any act for
carrying on in the usual way business of the kind carried on by the firm of
which he is a member binds the firm and his partners unless the other party
‘either knows that he has no authority or does not know or believe him to be
a partner’.
C
As Construction Engineering did not know or believe Tambel to be a partner, this
limb of the section could not assist it. Finally, the court noted that irrespective of
Tambel having actual or ostensible authority to enter into the building contract
on behalf of Hexyl as an undisclosed principal, the fact remained that it did not
contract in that capacity in any case.
3.52
Finally, it should be noted that the general law agency concept of ratification
is relevant to consider here. This concept, which is explained in more detail
in Chapter 9, operates where a person who has purported to act as an agent
but who actually had no authority to so act, has had their actions adopted or
approved by the person who was originally said to be the principal. This situation
52. Baxt, Fletcher & Fridman, see note 1 above, [1.32C].
53. See also ACT s 23; NSW s 19; NT s 23; Qld s 22; SA s 19; Tas s 24; Vic s 23; WA s 29.
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was described by Tindal CJ in Wilson v Tumman (1843) 6 Man & G 236 at 242; 134
ER 879 at 882 as follows:
That an act done by a person, not assuming to act for himself, but for such
other person, without any precedent authority whatsoever, becomes the
act of the principal if subsequently ratified by him, is the known and well
established principle of law.
Ratification can be express or implied and where applicable the principal will be
liable for the actions which have been ratified. In a partnership context this means
that where a person’s actions have been ratified by co-partners, the co-partners
will be liable for those actions: Molinas v Smith [1932] St R Qd 77.
The Partnership Act contains other sections which regulate a partner’s dealings
with outsiders. These sections are discussed below.
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N
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:
Other sections of the Partnership Act regulating
partner’s dealings with outsiders
Partners bound by acts done on behalf of firm
3.54
The Partnership Act54 provides:
(1)
An act or instrument relating to the business of a firm other than an
incorporated limited partnership, and done or executed in the firm-name,
or in any other manner, showing an intention to bind the firm by any
person thereto authorised, whether a partner or not, is binding on the
firm and all the partners.
(2)
An act or instrument relating to the business of a firm that is an
incorporated limited partnership, and done or executed in the firm-name,
or in any other manner, showing an intention to bind the firm by any
person authorised to bind the firm, whether a general partner or not, is
(subject to section 9(3)) binding on the firm and all the general partners.
(3)
This section does not affect any general rule of law relating to the
execution of deeds or negotiable instruments.
C
This section effectively means that acts done with the intention of binding the
firm will bind the firm: Lysaght Bros v Falk (1905) 2 CLR 421. However, partners will
not be bound where any act was done or document signed, even if related to the
business and done for its benefit, if it is done by a person in his or her own right and
not on behalf of the firm. The question will always be: did the person act privately
or for the firm? This provision is complemented by the following two sections.
Partners using the credit of the firm for private purposes
3.55
The Partnership Act55 provides:
(1)
Where one partner pledges the credit of a firm other than a firm that
is an incorporated limited partnership 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
54. ACT s 10; NSW s 6; NT s 10; Qld s 9; SA s 6; Tas s 11; Vic s 10; WA s 13.
55. ACT s 11; NSW s 7; NT s 11; Qld s 10; SA s 7; Tas s 12; Vic s 11; WA s 14.
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partners; but this section does not affect any personal liability incurred
by an individual partner.
(2)
Where a general partner pledges the credit of a firm that is an incorporated
limited partnership for a purpose apparently not connected with the firm’s
ordinary course of business, the firm is not bound unless the general
partner is in fact specially authorised by the firm, but this section does
not affect any personal liability incurred by an individual general partner.
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N
ex
is
:
This means that partners using credit of the firm for private purposes will not bind
the partnership unless they are specially authorised by the other partners. The
limits of being ‘specially authorised’ are unclear; however, there is some authority
to suggest that if an outsider had reasonable grounds to suppose that there was
authority (Kendal v Wood (1870) LR 6 Ex 243 per Blackburn J) or a representation
or some form of acquiescence (London Chartered Bank of Australia v Kerr (1878)
4 VLR (L) 330) existed, this would be enough to satisfy the section.
Notice of an agreement that a firm will not be bound by the
act of a partner
3.56
The Partnership Act56 provides:
(1)
If it has been agreed between the partners that any restrictions shall be
placed upon the power of any one or more of them to bind a firm other
than a firm that is an incorporated limited partnership, no act done in
contravention of the agreement is binding on the firm with respect to
persons having notice of the agreement.
(2)
If it has been agreed by the partners in an incorporated limited
partnership that any restrictions are to be placed on the power (if any) of
any one or more of them to bind the firm, no act done in contravention
of the agreement is binding on the firm with respect to persons having
notice of the agreement.
Therefore partners who have restrictions placed upon their powers to bind the
firm will not bind it when they exceed these restrictions if the other party to the
transaction knows of the restrictions. This applies where the partner’s powers
have been restricted or terminated. In such cases, notice of the restriction or
termination must be given to the outsider: Bowman v Bacon (1897) 18 LR (NSW) 12.
C
Liability in contract, tort and crime
Debts and obligations
3.57
The Partnership Act57 provides:
(1)
Every partner in a firm other than an incorporated limited partnership is
liable jointly with the other partners for all debts and obligations of the firm
incurred while the partner is a partner; and (if the partner is an individual)
after the partner’s death the partner’s estate is also severally liable in a due
course of administration for such debts and obligations so far as they remain
unsatisfied, but subject to the prior payment of the partner’s separate debts.
56. ACT s 12; NSW s 8; NT s 12; Qld s 11; SA s 8; Tas s 13; Vic s 12; WA s 15.
57.
ACT s 13; NSW s 9; NT s 13; Qld s 12; SA s 9; Tas s 14; Vic s 13; WA s 16.
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(2)
Every general partner in an incorporated limited partnership is liable
jointly with the incorporated limited partnership for all debts and
obligations of the partnership incurred while the general partner is a
general partner, and (if the general partner is an individual) after the
general partner’s death the general partner’s estate is also severally
liable in a due course of administration for such debts or obligations so
far as they remain unsatisfied but subject to the prior payment of the
partner’s separate debts.
(3)
Despite subsection (2), a general partner in an incorporated limited
partnership is only liable for any debts or obligations of the incorporated
limited partnership:
N
ex
is
:
(a) to the extent the incorporated limited partnership is unable to satisfy
the debts and obligations, or
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(b) to a greater extent provided by the partnership agreement.
It is clear that the reference to ‘debts and obligations of the firm’ is a reference to
the debts and liabilities ‘of the collection of persons who make up the partnership’:
Woodgate v Davis (2002) 42 ACSR 286.
Joint liability means that, although liability is incurred by two or more persons,
there is only one right of action against them. So, once judgment is entered against
a partner or partners, further legal action cannot be brought against the other
partners who could have been jointly liable had they been included in the action.
On a practical note, Rules of Court in most states allow an action to be brought in
the name of the firm. This means that it is not necessary to name all the partners
in a summons. Further, the debt or obligation must have been incurred while the
deceased was a partner. If the liability arises after the partner’s death, their estate
does not incur any liability: Bagel v Miller [1903] 2 KB 212.
C
Despite this, complications nevertheless exist when suing a partnership. It
sometimes becomes a problem in identifying the critical date in order to impose
liability on partners. This issue was raised in South Australia v Peat Marwick
Mitchell (1997) 24 ACSR 231 at 253. In that case, Olsson J stated that the critical
dates in terms of partner liability are those at which relevant breaches are said to
have occurred. According to his Honour (at 253):
A firm, and all persons then partners in it, may be liable, as at the date of
any breach, for the ultimate consequences of that breach in terms of loss or
damage. However, the Partnership Act [South Australia] does not, on the face
of it render one firm liable for the acts or omissions of another firm at some
prior or later point in time, simply because the two firms may have had some
common partners.
Liability of the firm for wrongs
3.58
The Partnership Act58 provides:
(1)
Subject to subsection (2), where 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
58. ACT s 14; NSW s 10; NT s 14; Qld s 13; SA s 10; Tas s 15; Vic s 14; WA s 17.
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of the partner’s co-partners, loss or injury is caused to any person not
being a partner of the firm, or any penalty is incurred, the firm is liable
therefor to the same extent as the partner so acting or omitting to act.
(2)
For the purposes of subsection (1), a partner in a firm other than an
incorporated limited partnership who commits a wrongful act or
omission as a director of a body corporate, within the meaning of the
Corporations Act 2001 of the Commonwealth, is not to be taken to be
acting in the ordinary course of the business of the firm or with the
authority of the partner’s co-partners only because of any one or more
of the following:
N
ex
is
:
(a) the partner obtained the agreement or authority of the partner’s
co-partners, or some of them, to be appointed or to act as a director
of the body corporate,
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(b) remuneration that the partner receives for acting as a director of the
body corporate forms part of the income of the firm,
(c) any co-partner is also a director of that or any other body corporate.
(3)
Subject to subsection (4), where by any wrongful act or omission of
any general partner in an incorporated limited partnership acting in the
ordinary course of the business of the incorporated limited partnership,
or with its authority, loss or injury is caused to any person not being
a partner in the incorporated limited partnership, or any penalty is
incurred, the incorporated limited partnership is liable in respect of that
loss or injury or penalty to the same extent as the general partner so
acting or omitting to act.
(4)
For the purposes of subsection (3), a general partner in an incorporated
limited partnership who commits a wrongful act or omission as a director
of a body corporate, within the meaning of the Corporations Act 2001 of
the Commonwealth, is not to be taken to be acting in the ordinary course
of business of the incorporated limited partnership or with its authority
only because of any one or more of the following:
(a) the general partner obtained the agreement or authority of the
incorporated limited partnership to be appointed or to act as a
director of the body corporate,
C
(b) remuneration that the general partner receives for acting as a
director of the body corporate forms part of the income of the
incorporated limited partnership,
(c) any other general partner in the incorporated limited partnership is
also a director of that or any other body corporate.
Further, the Partnership Act sets out59 that the liability for wrongs is joint and
several. In this regard, the Act provides:
(1)
Every partner in a firm other than an incorporated limited partnership
is liable jointly with the partner’s co-partners and also severally for
everything for which the firm while the partner is a partner therein
becomes liable under either of the two last preceding sections.
59. ACT s 16; NSW s 12; NT s 16; Qld s 15; SA s 12; Tas s 17; Vic s 16; WA s 19.
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(2)
Every general partner in an incorporated limited partnership is liable jointly
with the other general partners in the partnership and also severally for
everything for which the firm becomes liable under section 10(3) or 11(2)
while the general partner is a general partner in the firm.
(3)
Despite subsection (2), a general partner in an incorporated limited
partnership is only liable for any liability of the incorporated limited
partnership referred to in that subsection:
(a) to the extent the incorporated limited partnership is unable to satisfy
the liability, or
(b) to a greater extent provided by the partnership agreement.
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:
Thus liability for both civil wrongs and crime is covered by these sections. In order
for liability to be established it must be shown that the wrongful act or omission
of the partner:
• occurred in the ordinary course of the business of the firm; or
• was authorised by the co-partners.
In relation to the meaning of the ordinary course of business of the firm, see
Polkinghorne v Holland (1934) 51 CLR 143,60 discussed at 3.44. Importantly, in
Walker v European Electronics Pty Ltd (1990–1991) 23 NSWLR 1, Gleeson CJ stated
(at 10–11):
… the essential task remains one of identifying the nature and scope of
the business of the firm and relating the wrongful act to the business so
identified. …
The nature and scope of the business of a firm will fall to be determined by
reference to the agreement between the partners.
C
Mahoney JA, in agreeing with Gleeson CJ, added (at 11):
In considering whether the act of a person is done in the ordinary course of
the business of a firm of which he is a member, it is, of course, necessary to
determine what the business of the firm is. Sometimes the business of the
firm is defined or described in the partnership agreement. In such a case,
the court must decide, as a question of fact, whether the act in question
can be and was done in the course of carrying it on. This may be decided
by reference to specific evidence that an act of the kind in question is apt to
be, or was, done in carrying on such a business. Or, in some cases, the court
may be in a position to take notice of the fact that a business of the kind in
question is apt to be carried on by doing acts of the relevant kind.
In other cases, where the business is not defined or described in the
partnership agreement, it is necessary to decide, on the facts of the case,
what the business is and what acts are apt to be done in carrying it on.
3.59
In National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160
CLR 251; 60 ALJR 379, the respondent, Batty, was a partner with a person named
Davis in an accountancy practice in Katoomba. Davis was also a director of a
company called Bushby Pty Ltd, and he deposited two cheques belonging to
the company (Bushby) in the accountancy’s practice trust account. Davis later
60. Baxt, Fletcher & Fridman, see note 1 above, [1.36C].
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withdrew the proceeds from these cheques and misappropriated the whole
amount. The appellant bank was held liable to the third party in conversion for
collecting the proceeds for Davis and, on appeal, the appellant argued that s 10 of
the New South Wales Partnership Act61 made the respondent liable. Davis in the
meantime had died.
The High Court, by majority, held that the deposit of the cheques in the partnership
account was not a transaction in the ordinary course of the firm’s business and
was not within the actual or apparent authority of Davis. This meant that the
respondent was not liable for Davis’s wrongful act.
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In finding that Davis, by depositing the cheques, was not acting in the ordinary
course of the business of the firm, support was found in the fact that the
cheques were made out to the company, not the firm, and that the cheques were
substantially larger than any others which had been paid into the trust account:
at (CLR) 262; (ALJR) 381 per Gibbs J and at (CLR) 285; (ALJR) 391 per Brennan J.
Further, unlike other cheques paid into the account, these were payable to a third
party, were not deposited through the usual trust account deposit book, and were
not deposited by the secretary who normally carried out the banking. Deane J
suggested (at (CLR) 296; (ALJR) 398) that an examination of the actual practices of
the particular firm was required.
According to Brennan J, each partner is an agent only in and for the business
of the firm. Acts beyond that business will not bind the firm. His Honour stated
(at (CLR) 275; (ALJR) 388):
If a partner’s act is not in fact ‘for the purpose of the business of the
partnership’ the firm is bound by his act only if it is ‘an act for carrying on in
the usual way business of the kind carried on by the firm’ and the absence
of authority is unknown to the person with whom he is dealing. Acts done
in the usual way of carrying on a partnership business are usually done for
the purpose of the business and unless the person with whom the partner
is dealing knows that the act is not done for that purpose, he may assume
that it is.
C
On the issue of whether Davis acted ‘with the authority of his co-partner’ in
depositing the cheques to the credit of the trust account, the court found that
Davis had no wider authority than the ordinary authority he had as a partner. The
High Court noted that s 10 of the New South Wales Partnership Act62 referred to
‘authority’ whereas s 11 of that Act,63 in contrast, referred to ‘apparent authority’.
This prompted Gibbs CJ to comment (at (CLR) 260; (ALJR) 381):
The contrast between the two sections might suggest that s 10 refers only to
actual authority (including, no doubt, implied authority), and does not refer to
apparent (or ostensible) authority. However, it has been said that ‘the liability
of partners which is declared by these sections is merely a branch of the law
of principal and agent’. Under the law of agency, as commonly stated, the
principal is liable for a tort committed by his agent acting within the scope of
61.
ACT s 14; NT s 14; Qld s 13; SA s 10; Tas s 15; Vic s 14; WA s 17.
62. ACT s 14; NT s 14; Qld s 13; SA s 10; Tas s 15; Vic s 14; WA s 17.
63. ACT s 15; NT s 15; Qld s 14; SA s 11; Tas s 16; Vic s 15; WA s 18.
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his authority, whether the authority be actual or apparent … In many cases,
actual and apparent authority will ‘co-exist and coincide’.
Here it was held that the apparent authority of Davis vis-à-vis the bank did not
extend to doing anything outside the ordinary course of the business of the firm.
When the account was opened up it could not be said that Davis was authorised to
deposit cheques which neither he nor Batty had any right or authority to deposit.
The fact that the firm has not received any benefit from the wrongful act does not
excuse it. Further, it does not matter that the transaction was not wrongful where
it is to be carried out in a wrongful manner: Hamlyn v Houston [1903] 1 KB 81.
The Partnership Act64 provides:
In the following cases involving the partners of a firm other than an
incorporated limited partnership, namely:
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(1)
N
3.60
ex
is
:
Liability for misapplication of money or property received by
the firm
(a) Where one partner acting within the scope of the partner’s apparent
authority receives the money or property of a third person and
misapplies it, and
(b) When 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 one or more of the partners while it is in the custody of the firm,
the firm is liable to make good the loss.
(2)
In the following cases involving general partners in an incorporated
limited partnership:
(a) where one general partner acting within the scope of the general
partner’s apparent authority receives the money or property of a
third person and misapplies it,
(b) when an incorporated limited partnership in the course of its
business receives money or property of a third person, and the
money or property so received is misapplied by one or more of the
general partners while it is in the custody of the incorporated limited
partnership,
the incorporated limited partnership is liable to make good the loss.
C
This section needs to be read with the succeeding section of the Act65 mentioned
at 3.58.
Paragraph (1)(a) relates to instances where the partner is acting within his or
her apparent authority and actually misapplies the money or property. In Mann
v Hulme (1961) 106 CLR 136; 35 ALJR 153, M and R were solicitors in partnership.
Mr and Mrs H were clients of the firm and dealt with R. R prepared their wills
and discussed the possibility of making investments on their behalf. R told Mr and
Mrs H that the firm had clients engaged in the building trade who wanted to
borrow money on second mortgage from time to time, and he offered to invest
64. ACT s 15; NSW s 11; NT s 15; Qld s 14; SA s 11; Tas s 16; Vic s 15; WA s 18.
65. ACT s 16; NSW s 12; NT s 15; Qld s 15; SA s 12; Tas s 17; Vic s 16; WA s 19.
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their money in this way. In return, Mr and Mrs H would receive interest. R assured
them that their investment would be quite safe and, as an added inducement,
R offered to give them his own promissory notes as additional security.
Subsequently, Mr and Mrs H forwarded money to R to be invested on their behalf.
R delivered promissory notes to them and, over time, Mr and Mrs H received some
interest payments in the form of cheques signed by R and drawn on the firm’s
trust account. R misapplied the moneys and Mr and Mrs H sued M and R for their
loss. There was no question that at the time the money was received by R, he
carried on practice as a solicitor in partnership with M. However, M neither took
part in nor had any knowledge of the dealings with Mr and Mrs H.
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:
On appeal to the High Court, the court was asked to consider the matter in the
light of s 11 of the Partnership Act and the material issue was whether R was acting
within the scope of his apparent authority as a partner in the firm in his dealings
with Mr and Mrs H.
According to Dixon CJ, Taylor, Menzies and Windeyer JJ66 (at (CLR) 144; (ALJR) 156):
But even if no mention was made of ‘second mortgages’ there can be no
doubt that the moneys were placed in Richardson’s [R’s] hands for the
purpose of making specific investments from time to time upon securities
prepared by him, and such a finding would be sufficient to bring the case
within s 11 [of the New South Wales Partnership Act].
The fact that the arrangement included the provision of promissory notes by R,
while unusual, was not a basis for concluding that the receipt of the money
invested was not in the ordinary course of the business of the firm.
Paragraph (1)(b) relates to cases whereby money or property is received by the firm
in the course of its business and this money or property is misapplied by one of the
partners. In Rhodes v Moules [1895] 1 Ch 236, Rew was a solicitor in partnership
with Messrs Hughes and Masterman. Mr Rhodes was a client of the firm and the
firm had acted for him on previous occasions. Mr Rhodes wanted to borrow some
money on a property and asked Rew as his solicitor to assist him to effect the
mortgage. Some clients of the firm, the Moules, were willing to lend the money.
As security for the mortgage, Mr Rhodes gave Rew some share certificates and
these were misappropriated by Rew.
C
One of the questions facing the court was whether the other two partners were
liable for Rew’s actions. The court held that the partners were jointly and severally
liable for the value of the shares under both paras (1)(a) and (b). According to
Lindley LJ (at 249):
The only conclusion at which I can arrive is that the plaintiff’s certificates came
into Rew’s hands when acting within the scope of his apparent authority. The
case is thus brought within the first half of s 11 of the Partnership Act, 1890.
But it is also, I think, brought within the second half.
The judge said that ‘the inference that the plaintiff’s certificates were received by
the firm in the course of its business’ was justified.
66. Note that the other member of the court, Fullagar J, died before judgment was delivered in the case. Further, the decision has
since been applied in Law Institute of Victoria v Cowan Investment Survey Pty Ltd [1973] VR 293.
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In contrast, in National Commercial Banking Corporation of Australia Ltd v Batty
(1986) 160 CLR 251; 60 ALJR 379, mentioned at 3.59, the High Court found that the
firm was not liable for the wrongful actions of the partner because they were not
within the scope of the partner’s apparent authority and because the firm had
not received the money in the ordinary course of the firm’s business. Thus, both
subs 1(a) and (b) were not satisfied.
Incoming and outgoing partners
The Partnership Act67 provides:
(1)
A person who is admitted as a partner into an existing firm other than
a limited partnership or incorporated limited partnership does not by
that admission alone become liable for anything done before the person
became a partner.
(2)
A person who is admitted as a general partner into an existing limited
partnership or incorporated limited partnership does not by that
admission alone become liable for anything done before the person
became a general partner.
(3)
A partner who retires from a firm other than a limited partnership or
incorporated limited partnership does not by that retirement alone
cease to be liable for partnership debts and obligations incurred before
the partner’s retirement.
(4)
A partner who retires from a limited partnership or incorporated limited
partnership does not by that retirement alone cease to be liable for
liabilities of the firm incurred before the partner’s retirement for which
the partner was liable.
(5)
A retiring partner in a firm other than a limited partnership or incorporated
limited partnership may be discharged from any existing liabilities by an
agreement to that effect between the partner and the members of the
firm as newly constituted and the creditors, and this agreement may be
either expressed or inferred as a fact from the course of dealing between
the creditors and the firm as newly constituted.
(6)
A retiring partner in a limited partnership or incorporated limited
partnership may be discharged from any existing liabilities by an
agreement to that effect between the partner and the firm and the
creditors, and this agreement may be either expressed or inferred as a
fact from the course of dealing between the creditors and the firm.
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:
3.61
C
Note: ‘Liability’ is defined in section 49.
Basically, a partner will be only liable for debts and obligations incurred while he or
she is a partner. Retiring partners will be liable for debts and obligations incurred
while they were partners, subject to being discharged by the new partners and
creditors. However, consent of the incoming partners or of creditors to the debts
will often be drawn as an inference from the parties’ conduct: Ex parte Peel (1802)
6 Ves 602; 31 ER 1216.
67.
ACT s 21; NSW s 17; NT s 21; Qld s 20; SA s 17; Tas s 22; Vic s 21; WA s 24.
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Special provisions dealing with ‘continuing guarantees’ given by partners are also
dealt with in the Partnership Act.68
In New South Wales, when a partner retires from a firm he or she should place an
advertisement in the New South Wales Government Gazette, a Sydney newspaper,
and a local newspaper published in the area where the firm carries on business,
so as to give notice to outsiders.69 Failure to do so could give rights to outsiders on
the basis that the person still appears to be a partner; that is, on the basis that he
or she is an apparent partner.
Liability of non-partners — by ‘holding out’ or estoppel
The Partnership Act70 provides:
:
Every one 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 other than
a limited partnership or incorporated limited partnership, is liable as a
partner to any one who has on the faith of any such 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.
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(1)
ex
is
3.62
(1A) Every one 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 general partner in a particular firm that is a limited
partnership or an incorporated limited partnership, is liable as a general
partner to any one who has on the faith of any such 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 general partner making the representation
or suffering it to be made.
(2)
Provided that where after a partner’s death the partnership business
is continued in the old firm-name, the continued use of that name or
of the deceased partner’s name as part thereof shall not of itself make
the partner’s executors or administrators’ estate or effects liable for any
partnership debts contracted after the partner’s death.
C
This section makes it clear that it is the person who is represented as a partner
or who represents himself or herself as a partner who is liable to outsiders who
have on the faith of the representation given credit to the firm. Such a person
might be described as a ‘partner by estoppel’. Estoppel means that if any
person expressly or by conduct represents to another that a certain situation
exists and the other person acts to his or her own detriment, then the person
who made the representation will not be allowed to deny the truth of what he
or she said.
68. ACT s 22; NSW s 18; NT s 21; Qld s 21; SA s 18; Tas s 23; Vic s 22; WA s 25.
69. ACT ss 41, 43; NSW s 36; NT s 40; Qld s 39; SA s 36; Tas s 41; Vic s 40; WA s 47.
70. ACT s 18; NSW s 14; NT s 18; Qld s 17; SA s 14; Tas s 19; Vic s 18; WA s 21.
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In Re Buchanan & Co (1876) 4 QSCR 202, it was held that the section places
liability upon the person who represents themselves, or allows themselves to be
represented, as a partner — not upon the actual partners.
Thus to incur liability under this section three tests need to be fulfilled:
1. A representation must be made that the person is a partner. This can be done by
the person themselves or by any of the partners generally. It will be a question
of fact whether a representation has been made. Further, the representation
need not have been made directly to the person who acts upon it. In Martyn
v Gray (1863) 143 ER 667 at 674, Williams J said:
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:
If the defendant informs AB that he is a partner in a commercial
establishment and AB informs the plaintiff, and the plaintiff, believing
the defendant to be a member of the firm, supplies goods to them, the
defendant is liable for the price.
2. Credit must be provided by a third party who believes the representation to
be true: Martyn v Gray. Credit would include the receiving of property or the
incurring of an obligation.
3. The third party must rely upon the representation: Tower Cabinet Co Ltd
v Ingram [1949] 2 KB 397.
C
3.63
Section 14 of the Partnership Act 1892 (NSW) was raised in McNally v Harris
[2008] NSWSC 659, based upon the argument that a particular person, Licardy,
represented himself or knowingly suffered himself to be represented as a partner
with another, Harris, in three ways in a firm carrying on an advisory business:
first, by not contradicting Harris’s introduction of Licardy to a third party as his
partner; second, by allowing the office premises to be used for the conduct of
an advisory business under the name ‘Licardy Harris & Company’; and third, by
signing a particular trust deed which bore the name ‘Licardy Harris & Company’ as
the firm responsible for the preparation of the document. Based on the evidence,
it was held that Licardy had not knowingly suffered himself to be held out as a
partner with Harris in the three ways alleged. Further, it was held that a particular
third party did not advance money on the faith of any representation or even
assumption that Licardy was in partnership with Harris.
On the issue of giving credit, it has been held by the Full Court of the Supreme
Court of South Australia in Duke Group Ltd (in liq) v Pilmer [1999] SASC 97; (1999)
73 SASR 64; 31 ACSR 213, that for credit to be given on the face of the representation
that a person is a partner in a particular firm, the person giving the credit must
have relied upon that representation (at [1032]–[1050]): see also Lynch v Stiff (1943)
68 CLR 428 at 434–5;71 McNally v Harris [2008] NSWSC 659 at [132]–[133].
Admissions and representations by partners
3.64
The Partnership Act72 provides:
(1)
An admission or representation made by any partner in a firm other than
a limited partnership or incorporated limited partnership concerning the
partnership affairs, and in the ordinary course of its business, is evidence
against the firm.
71.
Baxt, Fletcher & Fridman, see note 1 above, [1.39C].
72.
ACT s 19; NSW s 15; NT s 19; Qld s 18; SA s 15; Tas s 20; Vic s 19; WA s 22.
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(2)
An admission or representation made by any general partner in a
limited partnership or incorporated limited partnership concerning the
partnership affairs, and in the ordinary course of its business, is evidence
against the firm.
The firm will be responsible in the circumstances contemplated by the section for
statements of a partner when they are made by the partner who is acting within
their actual or apparent authority.
ex
is
The fiduciary relationship between partners
N
Partners stand in a fiduciary relationship73 with each other. According to Dixon J
in Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384
at 407–8:74
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3.65
:
RELATIONSHIP OF PARTNERS TO EACH OTHER
The relation between partners is, of course, fiduciary. Indeed, it had been
said that a stronger case of fiduciary relationship cannot be conceived than
that which exists between partners. ‘Their mutual confidence is the life-blood
of the concern. It is because they trust one another that they are partners
in the first instance; it is because they continue to trust one another that
the business goes on’ (per Bacon VC in Helmore v Smith (1886) 35 Ch D 436
at 444). The relation is based, in some degree, upon a mutual confidence that
the partners will engage in some particular kind of activity or transaction for
the joint advantage only. In some degree it arises from the very fact that they
are associated for such a common end and are agents for one another in its
accomplishment … The subject matter over which the fiduciary obligations
extend is determined by the character of the venture or undertaking for which
the partnership exists, and this is to be ascertained, not merely from the
express agreement of the parties, whether embodied in written instruments
or not, but also from the course of dealing actually pursued by the firm. Once
the subject matter of the mutual confidence is so determined, it ought not
to be difficult to apply the clear and inflexible doctrines which determine the
accountability of fiduciaries for gains obtained in dealings with third parties.
C
The law presumes that a partnership is based upon the mutual trust, confidence
and integrity of the partners. It has been said that the utmost good faith is
fundamental to this relationship. In Cameron v Murdoch (1986) 63 ALR 575 at 587,
the Privy Council stated:
There can be no doubt that there is between existing partners, and between
surviving partners and the estate of a deceased former partner, a general duty
of utmost good faith: see Lindley on Partnership 15th ed (1984), at p 480. That
general duty is recognized and given effect to by, in particular, s 40 of the Act
of 1895 [the Western Australian Partnership Act]. In their Lordships’ opinion,
it is wholly or mainly this obligation of utmost good faith, which gives to
the relationships between existing partners, and between surviving partners
73.
For fiduciary duties generally, see Chapters 6, 7 and 21.
74.
Baxt, Fletcher & Fridman, see note 1 above, [1.23C].
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and the estate of a deceased former partner, the fiduciary nature which they
have been held to have. The existence of such fiduciary relationship is not,
however, in their Lordships’ view, equivalent for all purposes to a relationship
of trustee and cestui que trust.
See also Halsbury’s Laws of Australia, vol 19, L Brown & M Standen, Butterworths,
Sydney, [305-360].
The fiduciary obligations between partners may be varied by an agreement
involving full disclosure between the parties: Noranda Australia Ltd v Lachlan
Resources NL (1988) 14 NSWLR 1; Chan v Zacharia (1984) 154 CLR 178.75 The common
law and equitable obligations of partners are incorporated into the partnership
legislation by implication. This is so as long as they are not inconsistent with the
Partnership Act.76
ex
is
:
3.66
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The subject matter over which the fiduciary obligations extend is determined by
the character of the venture or undertaking for which the partnership exists, which
is ascertained both from the express agreement of the parties and from the course
of dealing actually pursued by the firm: Birtchnell v Equity Trustees, Executors and
Agency Co Ltd (1929) 42 CLR 384 at 407–877 per Dixon J.
Fiduciary obligations regulate the relationship between partners during the business
life of the partnership as well as during its dissolution: Everingham v Everingham
(1911) 12 SR (NSW) 5; 28 WN (NSW) 172;78 Chan v Zacharia (1984) 154 CLR 178.
Fiduciary obligations only cease upon the final settlement of accounts on the
winding up of the partnership.79
3.67
The fiduciary relationship between partners does not necessarily commence with
the partnership business or a prior agreement and may exist between prospective
partners who have embarked upon business together before the precise terms
of any partnership agreement have been settled (United Dominions Corporation
Ltd v Brian Pty Ltd (1985) 157 CLR 1;80 Ravinder Rohini Pty Ltd v Krizaic (1991)
30 FCR 300), or who have entered into partnership negotiations and embarked
upon conduct with a view to forming a partnership: Fraser Edmiston Pty Ltd v AGT
(Qld) Pty Ltd [1988] 2 Qd R 1.
The fiduciary duties which partners owe to each other include:
• to act in good faith and honesty: Cameron v Murdoch (1986) 63 ALR 575 at 587;
C
• to provide full accounts of all information and assets in a partner’s possession
or control which are material to the partnership business;
• to avoid any conflicts of interest;
• to avoid making a personal profit from partnership opportunities and information;
and
• to account for benefits obtained from partnership business.
75.
Baxt, Fletcher & Fridman, see note 1 above, [1.25C].
76.
ACT s 5; NSW s 46; NT s 4; Qld s 48; SA s 46; Tas s 5; Vic s 4; WA s 6.
77.
Baxt, Fletcher & Fridman, see note 1 above, [1.23C].
78. Baxt, Fletcher & Fridman, see note 1 above, [1.26C].
79.
ACT s 44; NSW s 38; NT s 42; Qld s 41; SA s 38; Tas s 43; Vic s 42; WA s 49.
80. Baxt, Fletcher & Fridman, see note 1 above, [1.24C].
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The duty to render accounts
3.68
A partner must provide true accounts and full information regarding all things
affecting the partnership to all other partners or their legal representatives.81
A partner’s right to true accounts and full information continues until an end is
put to it by a release, by settled accounts or by the lapse of such time as may
induce the court to refuse to interfere: Wilson v Carmichael (1904) 2 CLR 190
at 195.
Where accounts are improperly destroyed by a partner, it is presumed that that
partner had an improper purpose: Gray v Haig (1855) 20 Beav 219; 52 ER 587.
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:
A partner must disclose partnership opportunities to all other partners or their
legal representatives while the partnership is a going concern (Birtchnell v Equity
Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384;82 United Dominions
Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1;83 Chan v Zacharia (1984)
154 CLR 178)84 and must disclose any special knowledge about the condition of
the partnership when dissolution is contemplated, especially where the partner
with special knowledge proposes to buy out another’s interest: Sachs v Johnston
(1915) 17 GLR 511.
Right to inspect books and documents
3.69
Partnership books must be kept at the place of business of the partnership, or the
principal place if there is more than one, and every partner may, when he or she
thinks fit, have access to, inspect and copy any of them unless there is an express
or implied agreement to the contrary.85
A partner may appoint an agent to inspect the books on his or her behalf subject
to reasonable limitations: Bevan v Webb [1901] 2 Ch 59. If the appointed agent
has personal business interests which are adverse to, or conflict with, those of
the partnership business, such an appointment may be objected to by the other
partners: Dadswell v Jacobs (1887) 34 Ch D 278.
Order for production of books
3.70
The books of a partnership that are in daily use may be ordered to be produced
at the place of business of the partnership if there is a partnership action
pending. However, where a party cannot be trusted with custody of the books,
production of the books in court may be ordered: Mertens v Haigh (1860)
John 735; 70 ER 616.
C
Partnership books and documents may be produced to and inspected by a
defendant partner prior to serving his or her defence if the items are in the hands
of the plaintiff partner and are necessary for the defendant partner to prepare his
or her defence: Pickering v Rigby (1812) 18 Ves 484; 34 ER 400.
81.
ACT s 33; NSW s 28; NT s 32; Qld s 31; SA s 28; Tas s 33; Vic s 32; WA s 39.
82. Baxt, Fletcher & Fridman, see note 1 above, [1.23C].
83. Baxt, Fletcher & Fridman, see note 1 above, [1.24C].
84. Baxt, Fletcher & Fridman, see note 1 above, [1.25C].
85. ACT s 29(9); NSW s 24(9); NT s 28(1)(j); Qld s 27(9); SA s 24(ix); Tas s 29(I); Vic s 28(9); WA s 34(8).
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Private profit of partners
3.71
Every partner must account to the firm for any benefit derived from:
• any transaction concerning the partnership;
• any use by him or her of the partnership property, name or business
connection;86 or
• any transaction undertaken after the partnership has been dissolved by the
death of a partner and before its affairs have been completely wound up.87
This will be so where the benefit was obtained by the partner without the consent
of the other partners.
:
A partner’s obligations to the partnership do not cease until the partnership is
wound up, so that any new agreement entered into by a partner prior to winding
up, even if after dissolution, will be a partnership asset. In Chan v Zacharia
(1984) 154 CLR 178,88 the appellant and respondent were medical practitioners.
In September 1978, they entered into a written memorandum of agreement
under which Dr Zacharia agreed to sell, and Dr Chan agreed to purchase, one
half of Dr Zacharia’s ‘right title goodwill and interest’ in a medical practice
which Dr Zacharia was then carrying on in Adelaide, together with the ‘plant
equipment and chattels and other assets of the medical practice (excluding
book debts)’.
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3.72
Under the agreement, the two doctors agreed to carry on the medical practice as
equal partners for a period of one year (and thereafter until determined by notice
or death) upon the terms set out in the agreement. The agreement provided, inter
alia, that upon determination of the partnership an account was to be taken of
assets, debts and liabilities, the assets (other than goodwill) were to be sold and,
after payment of liabilities and expenses and unpaid profits due to partners, any
balance was to be divided equally between the partners.
C
The business was conducted at premises which had considerable advantages for
such a medical practice and over which a three-year lease with an option to renew
for another two years was held. The option had to be exercised not later than
three months before its termination by the ‘tenant’, by which term the doctors
were referred to in the lease. The lease and any renewed lease was assignable
with the consent of the lessor, which was not to be unreasonably or capriciously
withheld. During the third year of the lease the partnership was determined by
notice given by the appellant, and a receiver for the purpose of winding up was
appointed by court order. The respondent wished to exercise the option of renewal
of the lease but the appellant did not join with him in doing so and the option was
not exercised. Before expiry of the time for its exercise the appellant then sought
a renewal for two years, not for the partnership but for himself. Subsequently,
arrangements were made between the appellant and the owner of the premises
for a lease for two years on payment of a premium.
An issue for determination was whether the interest acquired by the appellant
in a new lease was an asset of the former partnership and was held by him as
86. ACT s 34(1); NSW s 29(1); NT s 33(1); Qld s 32(1); SA s 29(1); Tas s 34(1); Vic s 33(1); WA s 40(1).
87.
ACT s 34(2); NSW s 29(2); NT s 33(2); Qld s 32(2); SA s 29(2); Tas s 34(2); Vic s 33(2); WA s 40(2).
88. Baxt, Fletcher & Fridman, see note 1 above, [1.25C].
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a constructive trustee. The High Court (Gibbs CJ, Brennan, Deane and Dawson JJ;
Murphy J dissenting) held that there was a fiduciary relationship between the
partners with respect to partnership property, which arose from the partnership
and continued after its dissolution for the purpose of the realisation, application
and distribution of the partnership assets. In these circumstances, the appellant
had obtained a new lease in disregard of that fiduciary relationship and was
therefore bound to account to the partnership as a constructive trustee for any
benefit he received from the new lease.
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:
According to Deane and Dawson JJ (at 195, 206), the partners were under a dual
obligation in respect of the original lease, and this obligation continued after
the partnership’s dissolution. This arose from the fact that they held the lease
as trustees for the partnership and from their fiduciary obligations as partners.
Therefore the obligation of the appellant to account arose from both aspects of
their obligation.
Deane J added (at 203) that where a partner, without the consent of their
co-partner, obtains a renewal in their own name of a lease of partnership
premises, there is a rebuttable presumption of fact that the renewed lease was
obtained by use of their fiduciary position and that they hold it as a constructive
trustee for the partnership.
3.73
3.74
A partner and, after the partner’s death, his or her executor, is liable to account
to the other partners for undisclosed profits derived from the firm’s business:
Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384.89
However, a partner may derive private benefits using information acquired from
the partnership business where the source of the benefit is outside the scope
of the partnership business and is not in competition with the business: Aas
v Benham [1891] 2 Ch 244.
Partners may also be subject to the equitable doctrine of contribution: Friend
v Brooker [2009] HCA 21; (2009) 72 ACSR 1.
C
If a partner, without consent of the other partners, carries on business of the same
nature as and in competition with the business of the firm, he or she must account
for and pay over to the firm all profits made by him or her in that business.90
In Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384,91
Birtchnell, Porter and others were land agents in partnership. After Porter died,
the other partners found out that Porter, without disclosure, had profited from
land speculation with clients of the firm. The other partners claimed that Porter’s
executor should account for the profit made. The High Court agreed, as Porter
profited as a result of his connection with the firm and the type of work was in the
course of the firm’s business.
According to Dixon J (at 417), ‘he [Porter] pursued his separate interests, where the
joint interests should have been consulted, and excluded the partnership from a
benefit or chance of benefit which arose out of the connection of the firm’.
89. Baxt, Fletcher & Fridman, see note 1 above, [1.23C].
90. ACT s 35; NSW s 30; NT s 34; Qld s 33; SA s 30; Tas s 35; Vic s 34; WA s 41.
91.
See also Chapter 6.
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His Honour said (at 412):
ex
is
:
[The] partnership was entitled to avail itself of any opportunity to embark
upon [any transaction] which came to the knowledge of the partners or
any of them, and knowledge and information acquired by a partner as to
the readiness of a client to share such profits, as to the conditions upon
which he would do so, and generally as to every fact bearing upon the terms
which the partnership might negotiate with him, were all matters which no
partner could lawfully withhold from the firm and turn to his own account.
The relation between such a client and the partnership is a matter affecting
the joint interests which each member was bound to safeguard and protect,
and no member could enter into dealings or engagements which conflicted
or might conflict with those interests …
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Of the duties imposed by these doctrines, one which is material for the
decision of this case is that which forbids a partner from withholding from
the firm any opportunity of advantage which falls within the scope of its
undertakings, and from using for his own exclusive benefit, information,
knowledge or resources to which the firm is entitled …
Another duty of present materiality is that which requires a fiduciary to
refrain from engagements which conflict, or which may possibly conflict,
with the interests of those whom he is bound to protect … Further, and this,
perhaps, is a necessary corollary, the partner is responsible to his firm for
profits, although his firm could not itself have gained them.
Duties of partners as set out in the Partnership Act
3.75
The Partnership Act92 sets out variable rules which regulate partners. Briefly, these
rules include the following:
1. Rights and duties of partners which are contained in their agreement with each
other which are defined by the Act may be varied by the consent of all the
partners:93 Public Trustee v Schultz (1964) 111 CLR 482.
2. Partnership property:
C
(a) All property, and rights and interests in property, originally brought
into the partnership stock, or acquired on account of the firm or for the
purposes and in the course of the partnership business, are known as
‘partnership property’ and must be used exclusively for the purposes of
the partnership.94
It is the acts and intention of the partners that determine whether property
owned by a partner is in fact partnership property: Harvey v Harvey (1970)
120 CLR 529 (dealing with the ownership of a farm); O’Brien v Komesaroff
(1982) 150 CLR 310 (dealing with the ownership of copyright in precedent
unit trust deeds which had been drafted by a solicitor); Sze Tu v Lowe
[2014] NSWCA 462.
92. ACT ss 23–36; NSW ss 19–31; NT ss 23–35(1)(a); Qld ss 22–34; SA ss 19–31; Tas ss 24–36; Vic ss 23–35; WA ss 29–42.
93. ACT s 23; NSW s 19; NT s 23; Qld s 22; SA s 19; Tas s 24; Vic s 23; WA s 29.
94. ACT s 24; NSW s 20; NT s 24; Qld s 23; SA s 20; Tas s 25; Vic s 24; WA s 30.
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(b) If purchased with money belonging to the firm, then it is deemed to have
been bought on the account of the firm:95 Sze Tu v Lowe [2014] NSWCA 462
at [26], [113]–[127].
(c) If it is land that is held by the partnership, it becomes personal property.96
(d) A writ of execution levied against partnership property can only be issued if
judgment has been obtained against the firm.97
(e) The Partnership Act also provides that every partner is entitled to have the
property of the partnership applied in the payment of the debts and liabilities
of the firm and to have any surplus assets after the payment applied in the
payment of what is owing to the partners.98
ex
is
:
3. With regard to matters of management, where there is no special agreement:99
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(a) All partners are entitled to share equally in capital and profits and contribute
equally towards losses.
(b) The firm is to indemnify partners with respect to payments made in the
ordinary and proper conduct of the business of the firm.
(c) Every partner may take part in management. It is said in Lindley & Banks100
that it is inherent in the contract of a partnership that each partner will
be permitted and have the right to participate in the management and
administration of the partnership (see United Builders Pty Ltd v Mutual
Acceptance Ltd (1980) 144 CLR 673 at 379; 33 ALR 1), though a right to
participate in management can be modified by agreement: Bova v Avati
[2009] NSWSC 921 at [221].
(d) No partner is entitled to remuneration.
(e) No person can be introduced as a partner without the consent of all existing
partners.
(f) Any difference arising as to ordinary matters connected with the partnership
business may be decided by a majority of the partners.
(g) The partnership books are to be kept at the place of business of the
partnership.
4. No majority of partners can expel any partner unless power to do so has been
conferred by express agreement.101 In such cases, the power to expel must be
exercised in good faith.
C
5. Where no fixed term has been agreed upon for the duration of the partnership
(where, that is, it is a partnership at will), any partner may determine the
partnership at any time on giving notice.102 In Moss v Elphick [1910] 1 KB 846,103
it was held that every partnership was one at will unless there is an agreement
95. ACT s 26; NSW s 21; NT s 25; Qld s 24; SA s 21; Tas s 26; Vic s 25; WA s 31.
96. ACT s 27; NSW s 22; NT s 26; Qld s 25; SA s 22; Tas s 27; Vic s 26; WA ss 32–33.
97.
ACT s 28; NSW s 23; NT s 27; Qld s 26; SA s 23; Tas s 28; Vic s 27; WA s 28.
98. ACT s 45; NSW s 39; NT s 43; Qld s 42; SA s 39; Tas s 44; Vic s 43; WA s 50.
99. ACT s 29(10); NSW s 24; NT s 28; Qld s 27; SA s 24; Tas s 29; Vic s 28; WA s 34.
100. Banks, see note 6 above, [15-01], p 547.
101. ACT s 30; NSW s 25; NT s 29; Qld s 28; SA s 25; Tas s 30; Vic s 29; WA s 35(1).
102. ACT s 31; NSW s 26; NT s 30; Qld s 29; SA s 26; Tas s 31; Vic s 30; WA s 37.
103. Baxt, Fletcher & Fridman, see note 1 above, [1.45C].
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Corporations and Associations Law: Principles and Issues
to the contrary. Note that, where a partnership for a fixed term is continued,
then it is presumed that the continuation is in the old terms.104
6. Partners are bound to render true accounts and full information of all things
affecting the partnership to any partner or their legal representative.105
7. Partners must account to the firm for any benefit they derive without the
consent of the other partners from any transaction concerning the partnership
or for any use of partnership property, name or business connection.106
3.76
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DISSOLUTION OF A PARTNERSHIP
N
ex
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8. Finally, the Partnership Act states that if a partner without the consent of their
other partners carries on any business of the same nature as and competing
with the firm, he or she must account for and pay over to the firm all profits
made by him or her in that business.107
Subject to any agreement between the partners, a partnership is dissolved in the
ways set out in the Partnership Act:108
• by the expiration of a fixed term;109
• if entered into for a single undertaking, by the termination of such undertaking;110
• if entered into for an undefined time, by any partner giving notice of their
intention to dissolve the partnership.111 The right to dissolve the partnership
must be exercised bona fide and, in all jurisdictions except the Australian Capital
Territory, the notice must be in writing. Further, the notice must be unambiguous
in its intention to dissolve the partnership;
• by the death of a partner.112 An agreement that the partnership is to continue
notwithstanding the death of a partner must be a specific agreement made by
all the partners before the death: Mannigel v Aitken (1985) 9 FCR 1;
• by the bankruptcy of a partner.113 Dissolution is effective from the date of the
relevant act of bankruptcy; and
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3.77
• if an event occurs making it unlawful for the business of the firm to be
carried on.114
A partnership may, at the option of the other partners, be dissolved if any partner
suffers his or her share of the partnership property to be charged for that partner’s
separate debt.115
104. ACT s 32; NSW s 27; NT s 31; Qld s 30; SA s 27; Tas s 32; Vic s 31; WA s 38.
105. ACT s 33; NSW s 28; NT s 32; Qld s 31; SA s 28; Tas s 33; Vic s 32; WA s 39.
106. ACT s 34; NSW s 29; NT s 33; Qld s 32; SA s 29; Tas s 34; Vic s 33; WA s 40.
107. ACT s 35; NSW s 30; NT s 34; Qld s 33; SA s 30; Tas s 35; Vic s 34; WA s 41.
108. ACT ss 37–39; NSW ss 32–34; NT ss 36–38; Qld ss 35–37; SA ss 32–34; Tas ss 37–39; Vic ss 36–38; WA ss 43–45.
109. ACT s 37(1)(a); NSW s 32(a); NT s 36(1)(a); Qld s 35(1); SA s 32(a); Tas s 37(a); Vic s 36(a); WA s 43(a).
110. ACT s 37(1)(b); NSW s 32(b); NT s 36(1)(b); Qld s 35(2); SA s 32(b); Tas s 37(b); Vic s 36(b); WA s 43(b).
111.
ACT s 37(1)(c); NSW s 32(c); NT s 36(1)(c); Qld s 35(3); SA s 32(c); Tas s 37(c); Vic s 36(c); WA s 43(c).
112. ACT s 38(1); NSW s 33(1); NT s 37(1); Qld s 36(1); SA s 33(1); Tas s 38(1); Vic s 37(1); WA s 44(1).
113. ACT s 38(1); NSW s 33(1); NT s 37(1); Qld s 36(1); SA s 33(1); Tas s 38(1); Vic s 37(1); WA s 44(1).
114. ACT s 39; NSW s 34; NT s 38; Qld s 37; SA s 34; Tas s 39; Vic s 38; WA s 45.
115. ACT s 38(2); NSW s 33(2); NT s 37(1); Qld s 36(2); SA s 33(2); Tas s 38(2); Vic s 37(2); WA s 44(2).
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3.78
In addition to the above grounds, a court may dissolve a partnership on any of the
following grounds:
• where a partner has been declared to be of unsound mind;116
• where a partner has become permanently incapacitated;117
• where a partner is guilty of conduct which, in the opinion of the court, is calculated
to prejudicially affect the business.118 This conduct need not be connected with
the business carried on by the partnership: Carmichael v Evans [1904] 1 Ch 486;
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• where one partner announces that they intend to leave the partnership. This
conduct could be seen as a repudiation of the partnership agreement if, when
viewed objectively, it can be seen to be accepted by the other partner or
partners: Ryder v Frohlich [2004] NSWCA 472 at [102]–[120], [127]–[133];
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• where there has been a wilful or persistent breach of the partnership agreement
or where a partner has otherwise engaged in unreasonable conduct.119 A state
of complete animosity such that the breach between the partners is irreparable
and that mutual confidence is destroyed is sufficient ground to support the
making of an order for dissolution: Knight v Bell (1887) 13 VLR 878;
• where partners have evinced an intention to abandon their obligations under
the partnership, that is, to ‘pull up stumps’ on the relationship: Ryder v Frohlich
[2004] NSWCA 472 at [135]–[141]; Jorgensen v Boyce (1896) 22 VLR 408;
• where the business can only be carried on at a loss:120 Handyside v Campbell
(1901) 17 TLR 623; and
• if circumstances have arisen that render it just and equitable that the partnership
be dissolved. Whether a dissolution is just and equitable is a question of fact. The
meaning of the expression ‘just and equitable’ has been considered in reference
to s 461(k) of the Corporations Act 2001 (Cth), discussed in Chapter 25: Ebrahimi
v Westbourne Galleries Ltd [1973] AC 360; Ruut v Head (1996) 20 ACSR 160.
Partners have a continuing authority after the winding up of a partnership121 in so far as
may be necessary to complete unfinished transactions and to wind up the partnership.
LIMITED LIABILITY PARTNERSHIPS
The concept of limited liability partnership has been long recognised in Australia.122
All the states and territories provide for the formation of limited liability partnerships.
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This form of business organisation has been under-utilised.123
116. ACT s 40(1)(a); NSW s 35(a); NT s 39(1)(a); Qld s 38(1); SA s 35(a); Tas Mental Health Act 1963 s 85(1)(f); Vic s 39(a); WA s 46(a).
117. ACT s 40(1)(b); NSW s 35(b); NT s 39(1)(b); Qld s 38(2); SA s 35(b); Tas s 40(b); Vic s 39(b); WA s 46(b).
118. ACT s 40(1)(c); NSW s 35(c); NT s 39(1)(c); Qld s 38(3); SA s 35(c); Tas s 40(c); Vic s 39(c); WA s 46(c).
119. ACT s 40(1)(d); NSW s 35(d); NT s 35(1)(d); Qld s 38(4); SA s 35(d); Tas s 40(d); Vic s 39(d); WA s 46(d).
120. ACT s 40(1)(e); NSW s 35(e); NT s 39(1)(e); Qld s 38(5); SA s 35(e); Tas s 40(e); Vic s 39(e); WA s 46(f).
121. ACT s 44; NSW s 38; NT s 42; Qld s 41; SA s 38; Tas s 43; Vic s 42; WA s 49.
122. See, for example, the Limited Liabilities Act 1853 (NSW). This Act was repealed soon after the adoption of companies legislation in
the form of the Companies Act 1874 (NSW). Importantly, Tasmania has had a Limited Partnership Act since 1908, Western Australia
since 1909 and Queensland since 1988. New South Wales provided for limited partnerships in 1991 and Victoria did likewise in 1992.
123. According to K Fletcher in his article ‘Interstate Trade: The Last Hurdle for Limited Partnerships’ (1993) 11 C & SLJ 433 at 435,
n 19, only 174 limited partnerships were registered between 1867 and 1989 with 106 being registered between 1976 and 1983.
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Definition
3.80
A limited partnership is a partnership consisting of:124
• at least one general partner; and
• at least one limited partner.
Limited partners are partners who contribute to the capital of the partnership but
who do not take part in its management, who cannot bind the firm and whose
liability to contribute to the debts or obligations of the partnership is limited to
their capital contribution.125 The obligations of the general partners in a limited
partnership are similar to those of partners in an ordinary partnership and their
liability is unlimited.126
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Number of partners
N
There must be at least one general partner and at least one limited partner to
form a limited partnership.127 In New South Wales, the Northern Territory and
Victoria, there is no restriction on the number of limited partners (as long as there
is at least one); however, the number of general partners must not be more than
20 persons. In Queensland and Tasmania, there is no restriction on the number
of limited or general partners in a limited partnership, as long as there are at
least two partners.128 In Western Australia, the total number of partners must not
exceed 20 for general businesses and 10 for businesses carrying on the business
of banking.129
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3.81
A corporation may be a limited partner130 and in the Australian Capital Territory,
New South Wales, the Northern Territory, Queensland, South Australia and Victoria,
a corporation may be a general partner.131
Formation
3.82
In all the states and territories, a limited partnership will be formed on the
registration of the partnership as a limited partnership.132 An application may
be made for the registration of a limited partnership by lodging with the
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124. ACT s 55; NSW s 51(1); NT s 53; Qld Partnership (Limited Liability) Act 1988 s 6(1)(a); SA ss 49, 73; Tas Limited Partnerships
Act 1908 s 4(2); Vic s 50(1); WA Limited Partnership Act 1909 s 4(2).
125. NSW ss 49, 54(2)(g), 60; NT ss 3, 56, 65; Qld Partnership (Limited Liability) Act 1988 ss 4(1), 7(2)(e), 10; SA s 1B; Tas Limited
Partnerships Act 1908 s 4(2); Vic ss 49(1), 54(2)(g), 60; WA Limited Partnership Act 1909 s 4(2).
126. ACT s 51; NSW s 49; NT s 3; Qld Partnership (Limited Liability) Act 1988 s 4(1); SA s 1B; Tas Limited Partnerships Act 1908 ss 3,
4(2); Vic s 49(1); WA Limited Partnership Act 1909 ss 3, 4(2).
127. ACT s 55; NSW s 51(1); NT s 53; Qld Partnership (Limited Liability) Act 1988 s 6(1)(a); SA s 49; Tas Limited Partnerships Act 1908
s 4(2); Vic s 50(1); WA Limited Partnership Act 1909 s 4(2).
128. Qld Partnership (Limited Liability) Act 1988 s 6(1)(a); Tas Limited Partnerships Act 1908 s 4(2).
129. WA Limited Partnership Act 1909 s 4(2).
130. ACT s 55; NSW s 51(2); NT s 53; Qld Partnership (Limited Liability) Act 1988 s 6(2); SA s 49; Tas Limited Partnerships Act 1908
s 4(4); Vic s 50(2); WA Limited Partnership Act 1909 s 4(4).
131. ACT s 55; NSW s 51(2); NT s 53; Qld Partnership (Limited Liability) Act 1988 s 6(2); SA s 49; Vic s 50(2).
132. ACT s 54; NSW s 53; NT s 52; Qld Partnership (Limited Liability) Act 1988 s 7(1); SA s 51; Tas Limited Partnerships Act 1908
ss 4(1), 5; Vic s 52; WA Limited Partnership Act 1909 ss 4(1), 5.
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The Law of Partnership
Registrar or Commissioner a statement signed by each proposed partner.133
In the Australian Capital Territory, New South Wales, the Northern Territory,
Queensland, South Australia and Victoria, this statement must contain the
following details:134
• the firm name;
• the full address of the office, or principal office if there is more than one, of the firm;
• a statement that the partnership is to be a limited partnership;
• the full name and address of each partner;
• a statement in relation to each partner as to whether that partner is a general
partner or a limited partner; and
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• a statement in relation to each limited partner to the effect that he or she is
a limited partner whose liability to contribute is limited to the extent of the
amount specified in the statement.
In Tasmania and Western Australia, the statement must contain:135
• the firm name;
• the general nature of the business;
• the principal place of business;
• a statement that the partnership is to be a limited partnership;
• the full name of each partner;
• the term, if any, for which the partnership is entered into and the date of its
commencement;
• a statement in relation to each partner as to whether that partner is a general
partner or a limited partner; and
• the sum contributed by each limited partner and whether paid in cash or how
otherwise paid.
The Registrar or Commissioner must register the partnership if an application has
been duly made. However, in New South Wales and Victoria there is a discretion
not to register if the Registrar or Commissioner is of the opinion that the firm
name would be ineligible for registration as a business name under the relevant
business names legislation.136 A certificate is issued at the time of registration and
this certificate is conclusive evidence that the partnership was formed on the date
of registration.137
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A register of all limited partnerships is kept and is available for public inspection.138
133. ACT s 58; NSW s 54(1); NT s 56; Qld Partnership (Limited Liability) Act 1988 s 7(1); SA s 52; Tas Limited Partnerships Act 1908
s 8(1); Vic s 54(1); WA Limited Partnership Act 1909 s 8.
134. ACT s 58; NSW s 54(2); NT s 56; Qld Partnership (Limited Liability) Act 1988 s 7(2), (3); SA s 52; Vic s 54(2).
135. Tas Limited Partnerships Act 1908 s 8(1); WA Limited Partnership Act 1909 s 8.
136. NSW s 55(1), (2); Vic s 55 (1), (2).
137. ACT s 62; NSW s 58(4); NT s 60; Qld Partnership (Limited Liability) Act 1988 s 8(4); SA s 56; Vic s 58(4).
138. ACT s 60; NSW s 57; NT s 58; Qld Partnership (Limited Liability) Act 1988 s 8(1), (2); SA ss 54, 57; Tas Limited Partnerships
Act 1908 ss 14, 16; Vic s 57; WA Limited Partnership Act 1909 ss 14, 16.
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Changes to registered particulars
If any changes occur in relation to the registered particulars of a limited partnership,
then a statement setting out the prescribed particulars must be lodged within
seven days after the change occurred.139 In New South Wales and Victoria, this
statement must be signed by all the general partners or by a general partner
who is authorised by all the general partners, and, if the change relates to the
admission of a limited partner or a change in the liability of a limited partner to
contribute, by the limited partner concerned.140 In Queensland, the statement
must be signed by or on behalf of all the general partners and where the change
involves the admission or departure of a partner or an alteration of the extent to
which a partner is liable to contribute, it must be signed by all those who are to be
partners after the change.141
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3.84
3.85
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Modification of the general law of partnership
The application of the general law of partnership to limited liability partnerships
has been modified by legislation which establishes and regulates limited liability
partnerships. This modification relates to, among other things, registration, liability,
management and dissolution of limited partnerships.
In regard to limited liability, the liability of a limited partner to contribute to the
debts or obligations of the limited partnership is not to exceed the amount shown
in the register.142 Where a limited partner makes a contribution towards these
debts then his or her liability is reduced by an equivalent amount.143
In New South Wales and Victoria, any reduction in the liability of a limited partner
does not extend to any debt that arose before the reduction is recorded in the
register.144 However, any increase in this liability extends to any debt or obligation
that arose before the increase was recorded.145 If a general partner becomes a
limited partner, the limitation of liability does not extend to debts or obligations
that arose prior to the change; however, if a limited partner becomes a general
partner there is no limitation of liability in respect of earlier debts.146
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In Queensland, the change of a partner’s status is not effective until it is recorded
in the register.147 In Tasmania and Western Australia, notice must be given of certain
particulars relating to the change of status of a partner, and, until such notice is
given, any arrangement purporting to evidence such a change is of no effect.148
139. ACT s 61; NSW s 56(1); NT s 59; Qld Partnership (Limited Liability) Act 1988 s 22(1); SA s 55; Tas Limited Partnerships Act 1908
s 9(1); Vic s 56(1); WA Limited Partnership Act 1909 s 9(1).
140. NSW s 56(2); Vic s 56(2).
141. Qld Partnership (Limited Liability) Act 1988 s 9(3).
142. ACT s 58; NSW ss 54(2)(g), 60(1); NT s 56; Qld Partnership (Limited Liability) Act 1988 ss 7(2)(e), 10(1); SA s 52(1a)(i); Tas Limited
Partnerships Act 1908 s 4(2); Vic ss 54(2)(g), 60(1); WA Limited Partnership Act 1909 s 4(2).
143. NSW s 65(2); Qld Partnership (Limited Liability) Act 1988 s 11(2); SA s 63; Tas Limited Partnerships Act 1908 s 4(3); Vic s 65;
WA Limited Partnership Act 1909 s 4(3).
144. NSW s 61(1); Qld s 55; SA s 59; Vic s 61(1).
145. NSW s 61(2); Qld s 55; SA s 59; Vic s 61(2).
146. NSW s 62; Vic s 62.
147. Qld Partnership (Limited Liability) Act 1988 s 9.
148. Tas Limited Partnerships Act 1908 ss 5, 11; WA Limited Partnership Act 1909 ss 5, 10.
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Management
3.86
A limited partner must not take part in management of the limited partnership and
does not have power to bind the partnership.149 If participation in management
occurs, the partner will be liable as if he or she were a general partner.150
In New South Wales and Victoria, limited partners will not be regarded as taking
part in management merely because they:
• are employees or independent contractors of the partnership or of a general
partner, or are officers of a general partner that is a corporation;
N
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• give advice to, or on behalf of, the limited partnership or a general partner in the
proper exercise of functions arising from the engagement of the limited partner
in a professional capacity or arising from business dealings between the limited
partner and the partnership or a general partner;
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• give a guarantee or indemnity;
• participate in any action by other limited partners for the purpose of enforcing
their rights or safeguarding their interests as limited partners;
• if authorised by the partnership agreement, participate in general meetings of
all the partners; or
• inspect and copy the books of the partnership and examine the state and
prospects of the business and advise and consult with other partners in relation
to them.151
The above provisions cannot be varied by the partnership agreement or with the
consent of the partners. It should be noted that there are no equivalent provisions
to s 67(3) of the New South Wales Act in the Australian Capital Territory and the
Northern Territory.
Differences arising as to ordinary matters connected with the business may be
decided, unless the partnership agreement states otherwise, by a majority of the
general partners.152 Further, a limited partner’s share in the partnership may be
assigned with the consent of the general partners.153
Dissolution
With regards to dissolution, there are certain restrictions which apply unless
the partners agree otherwise. First, a limited partner is not entitled to dissolve
the partnership by notice.154 Second, the partners are not entitled to dissolve the
partnership because a limited partner has allowed his or her share to be charged
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149. NSW s 67(1); Qld Partnership (Limited Liability) Act 1988 s 16(1); SA s 65; Tas Limited Partnerships Act 1908 s 6(1); Vic s 67(1);
WA Limited Partnership Act 1909 s 6(1).
150. NSW s 67(2); Qld Partnership (Limited Liability) Act 1988 s 16(2); SA s 65; Tas Limited Partnerships Act 1908 s 6(2); Vic s 67(2);
WA Limited Partnership Act 1909 s 6(2).
151. NSW s 67(3); Vic s 67(3).
152. ACT s 70; NSW s 68(1); NT s 69; Qld Partnership (Limited Liability) Act 1988 s 16(3)(a); SA s 66; Tas Limited Partnerships
Act 1908 s 6(6)(a); Vic s 68(1); WA Limited Partnership Act 1909 s 6(5)(a).
153. ACT s 71; NSW s 69(1); NT s 70; Qld Partnership (Limited Liability) Act 1988 s 16(3)(b); SA s 67; Tas Limited Partnerships Act 1908
s 6(6)(b); Vic s 69(1); WA Limited Partnership Act 1909 s 6(5)(b).
154. NSW s 70(1)(a); Qld Partnership (Limited Liability) Act 1988 s 17(1)(a); SA s 68; Tas Limited Partnerships Act 1908 s 6(6)(e);
Vic s 70(1)(a); WA Limited Partnership Act 1909 s 6(5)(e).
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Corporations and Associations Law: Principles and Issues
for his or her separate debts.155 Third, the death, bankruptcy or retirement — or, in
the case of a corporation, the dissolution — of a limited partner does not dissolve
the partnership.156 It should be noted that the fact that a limited partner is declared
to be of unsound mind is not a ground for dissolution unless the share or interest
cannot be ascertained or realised.157
Cessation
3.88
Provision is also made for cessation. Where none of the partners are limited
partners, or where the partners agree that they will carry on business, the
partnership ceases to be a limited partnership.158
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In New South Wales, Queensland and Victoria, where dissolution or cessation occurs,
the registered general partners must lodge with the Registrar or Commissioner a
notice of dissolution in the approved form. The Registrar or Commissioner must
then record that the dissolution or cessation took effect and when it took effect.159
There is also a requirement that the words ‘a limited partnership’ appear on all
‘documents’, as defined, and penalty provisions apply for non-compliance.160
Limited partnerships must maintain a registered office, as recorded in the register,
in the state of registration161 and they must display the certificate of registration
at that place.
Finally, where a limited partnership carries on business in a jurisdiction other
than its jurisdiction of formation, it will be required to be registered under the
Corporations Act 2001 (Cth).162
INCORPORATED LIMITED PARTNERSHIPS
3.89
The New South Wales partnership legislation also provides for a special type of
partnership, the Incorporated Limited Partnership (ILP), to be registered for four
types of limited partnerships which can be established under the Venture Capital
Act 2002 (Cth) for venture capital purposes:
• Venture Capital Partnerships (VCLP);
• Early Stage Venture Capital Limited Partnerships (ESVCLP);
• Australian Venture Capital Fund of Funds (AVCFOF); and
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• Venture Capital Management Partnerships (VCMP).
155. NSW s 70(1)(b); Qld Partnership (Limited Liability) Act 1988 s 17(1)(b); SA s 68; Tas Limited Partnerships Act 1908 s 6(6)(c);
Vic s 70(1)(b); WA Limited Partnership Act 1909 s 6(6)(c).
156. NSW s 70(1)(c); Qld Partnership (Limited Liability) Act 1988 s 17(1)(c); SA s 68; Tas Limited Partnerships Act 1908 s 6(4);
Vic s 70(1)(c); WA Limited Partnership Act 1909 s 6(2).
157. NSW s 70(2); Qld s 17(2) Partnership (Limited Liability) Act 1988; SA s 68; Vic s 70(2); WA s 6(2) Limited Partnership Act 1909.
158. NSW s 71(1); Qld Partnership (Limited Liability) Act 1988 s 18; SA s 69; Vic s 71(1).
159. NSW s 72(1), (2); Qld Partnership (Limited Liability) Act 1988 s 19(1); SA s 70; Vic s 72(1), (2).
160. ACT ss 88, 89; NSW s 75(3); NT ss 88, 90; Qld Partnership (Limited Liability) Act 1988 s 13; SA s 75; Vic s 75(3).
161. ACT s 90; NSW s 76; NT s 89; Qld Partnership (Limited Liability) Act 1988 s 15(2); SA s 76; Vic s 76.
162. Corporations Act 2001 (Cth) Pt 4.1 Div 1.
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The Law of Partnership
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ILPs are legal entities which can be set up under all state and territory partnership
legislation.163 In New South Wales, the Office of Fair Trading administers the
registration arrangement for ILPs under the New South Wales partnership
legislation. They appear to be the preferred entities to use when applying for
registration for venture capital purposes. The working and regulation of ILPs are
beyond the scope of this book.
163. ACT Pt 6; NSW Pt 3; NT Pt 3; Qld Ch 4; SA Pt 3; Tas Pt 3; Vic Pt 5; WA Limited Partnership Act 1909.
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