Corps LAW Tutorial - WEEK 4 PDF

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WEEK 4: SEPARATE ENTITY THEORY; PROMOTERS AND PREINCORPORATION CONTRACTS LANGUAGE RICH QUESTIONS (BASED ON REQUIRED PRE-LECTURE READING FOR WEEK 3) 1. What is the difference between the liability of a partnership and the liability of a partner for contractual obligations and torts? Answer: Debts and obligations incurred on behalf of the partnership are debts of the partnership and the partners are jointly liable for such debts: s9(1) PA; GRAW at 4.5. Partners are either vicariously or directly liable for torts, crimes, misapplications of money or property and breaches of trust by their co-partners committed in the ordinary course of the business of the firm. The partners are jointly and severally liable for tortuous claims : ss10-13 PA; GRAW at 4.6. 2. What are the nature and characteristics of the duties that the partners have to each other? Answer: The relationship between partners is both contractual and fiduciary (Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384). The basic duty fiduciary duty at common law is to act for the common good, i.e. avoid conflict of interest and no undisclosed private profits : GRAW at 5.1.1-5.1.4. The partners also have statutory duties set out in ss28-30 PA, namely the duty to render true accounts, the duty to account for private profits and the duty to not to compete with the firm : GRAW at 6.13-6.15. 3. Under which circumstances can a partner be expelled from a partnership? Answer: There is no inherent right to expel a partner. Unless the partnership agreement provides for expulsion the partnership has to be dissolved and wound up: s25 PA. However, a partner can be expelled if there is an express agreement between all partners (including the one to be expelled), the power to expel is exercised in good faith and the agreed procedures are strictly complied with. There is no need to observe the principles of natural justice, unless required by the agreement: Blisser v Daniel (1853) 10 Hare 493; 68 ER 1022; GRAW at 7.3.

PROBLEM SOLVING QUESTIONS (BASED ON REQUIRED PRE-LECTURE READING FOR WEEK 3) 1. R'N'L ACCOUNTING Rachel and Lin are partners since 2007; together they run an accountancy firm called "R'n'L Ac-counting". Rachel entered into the following transactions in the name of the partnership without Lin's knowledge or approval: - purchase of $1,500 worth of new stationary for the firm; - purchase of a fantastic looking $5,000 coffee machine designed by Alessi for the firm's office; - subscription for $20,000 worth of shares in Oman Gold, an oil exploration company; Rachel expected to make a quick profit when the company was listed, but the float was a failure. Advise Lin whether R'n'L Accounting, that has not yet made profits, is liable for the debts and as to what happens if Rachel doesn't return from her holidays in Paraguay Answer: Issue The issue is whether Rachel had actual or apparent authority to enter into the various contracts. Rule(s) Sections 5(1) and 9(1) Partnership Act 1891 (SA) ("PA") Application Partners are mutual agents for the purpose of the business. That Rachel, although a partner, acted without the knowledge or approval suggest that she did not have actual express authority to enter into any of the three contracts. The question is therefore whether Rachel had apparent authority under the second limb of s5(1) PA. Buying stationery for $1,500 for an accounting firm is for the purpose of the business and seems to be carrying on business of the kind (accountancy needs stationery) in the usual way it is normal that a partner or the firm manager orders stationery. Hence unless the stationery provider knew that Rachel had no authority or did not know or believe that Rachel is a partner, the firm will be bound to that first contract.

The Alessi coffee machine is still for the purpose of the business; it is quite common for offices to have a coffee machine for staff and clients. The transaction (purchase) seems to be done "in the usual way" as there are no unusual terms to the contract and the machine was delivered to the firm. However, it is arguable whether it is business of the kind to buy such an expensive coffee machine. For this price one could (almost) buy a professional machine, but R'n'L is not a Café it is an accounting firm. If the machine is a professional machine it is likely not to be "business of the kind". However, Alessi is an Italian star designer known to design common kitchen utilities, crockery etc. in his particular style. Alessi goods are often used as show pieces. If the Alessi coffee machine is for instance used as a show piece in the client's waiting room or one of the consultation rooms it could very well be "business of the kind" as accounting and law firms tend to show of art and nicely designed room. I submit that the second argument is more likely to prevail and that the firm will be bound to the contract. Speculative short-term shareholdings are not the business of the kind an accounting firm is usually carrying on. It is also questionable whether the short-term investment is in the usual way. Unless the firm has engaged previously in similar conduct with the acquiescence of all partners it is unlikely that the company will be bound even if the other contractual party did not know that Rachel was not authorised and believed she was a partner of the firm: Goldberg v Jenkins (1889) 15 VLR36; GRAW at 4.2.4. If the firm is bound to the contract and is not able to pay the debts, the partners are jointly liable for the debts: s(1) PA. As R'n'L is a fairly new firm and has not yet made a profit, it is likely that it will not be able to satisfy the obligations under the first two contracts. If this is the case Lin could be held liable. If Lin cannot get hold of Rachel because she stays in Paraguay, she will have to pay the whole amount from her private funds. Conclusion Stationery – yes, therefore Lin is bound Coffee machine – probably yes Short term share portfolio (in Oil exploration co.) – no, unless prior dealing by the firm with stockbroker

2. FROST EXPLOSION (FE) Faziah, Toshome and Agnes are equal partners in a snowboarding technology and equipment development business. Their mission statement is "to bring hard core boards to the snow of the world". They trade under the registered business name "Frost Explosion" (FE). Faziah, is a talented industrial designer, who specialises in snow- and hydrodynamic effects on snowboards, and is called the "Chief Executive" on her business cards, all FE advertising and FE correspondence. She works full-time in the business and receives a salary of $50,000 p.a. She has full managerial responsibility for the day-to-day running of the design workshop and has permission to spend up to $20,000 on any one purchase. Agnes is a silent partner, she as inherited $200,000 and has loaned this money to the partnership to fund the business. Toshome is a student, a very good and knowledgeable snowboarder. His main role is testing and evaluation of new FE products. He is keen to "free ride all the newest boarder gear from the mountain tops to the valleys below as hard and straight as possible". Toshome is not paid for his services and has no assets. The partnership's aim is to develop technology for snowboarding equipment that will provide technical competitive advantage, and thus be irresistible to hardcore snowboarders. They code name their project "Board For Life" (BFL) and plan to sell the technology when it is fully developed to a major snowboard manufacturer. Faziah reports that the BFL project is "looking real good". Toshome and Agnes are excited by the possibility of achieving their dream of a sale and retiring at 30 as millionaires. They are keen to approach a number of major corporations to demonstrate the superior design of BFL and to commence negotiations for sale. Faziah however is emphatic that it is too soon. She says "BFL needs more testing and development before it's released". She also tells Toshome and Agnes that she is now also working on an exciting new project. This is a spin off idea that came to her one night while she was thinking about the BFL project. The Snow Ski Technology (SST), as a combination of snowboarding and skiing will revolutionise winter sports on snow. Faziah is unable to convince her partners to delay sale negotiations of BFL. Against her wishes they begin discussions with Burrton an international snowboard equipment manufacturing company. Faziah is told by Toshome and Agnes "forget the SST project – concentrate on the BFL project".

Faziah is resentful of their premature negotiations. Fearing that an attempt to demonstrate the BFL product too early might reflect badly on her personal reputation, Faziah begins secret talks with Nitr-O Co., a competing snowboard manufacturing company. Four months later, the sale negotiations with Burrton have fallen through. As Faziah predicted, Burrton discovered the flaws in the BFL technology and refuses to go on with the negotiations. The Frost Explosion partnership is running out of money. Toshome and Agnes are then astonished to see Faziah featured on the cover of the Snow and Ski Weekly Magazine where she is described as the "new face of board technology". The article describes Nitr-O's "sensational new design" and "revolutionary Snow Ski Technology". Toshome and Agnes also discover that Faziah has become a 50% shareholder in Nitr-O SST Ltd, a joint venture with Nitr-O. The NitrO SST Ltd shares were allocated to Faziah in exchange for her know-how in adapting BFL technology and the Snow Ski Technology for use in conjunction with Nitr-O technology and products. Faziah's shares in Nitr-O SST are worth $300,000. Toshome and Agnes are furious. They confront Faziah and accuse her of "treachery and disloyalty". Faziah seems unconcerned and says: "I warned you what would happen if you went too fast. You told me to 'forget the Snow Ski Technology project'. I did the development of the Snow Ski Technology project in my own time. You've still got the BFL technology, what are you complaining about?" Advise Toshome and Agnes on the legal options available them based on these facts

Answer: Issue The issues are (1) whether Faziah breached her fiduciary duties and (2) what remedies Agnes and Toshome have. Rules Sections 1, 29 and 30 Partnership Act 1891 (SA) Application a) Existence of partnership We first have to determine the legal nature of the relationship between Faziah, Toshome and Agnes Section 1(1) PA defines partnership as relation between persons carrying on business in common with a view to profit. "Business" includes any trade or occupation: s1B PA. Developing snow boarding and snow skiing technology is an organised and systematic trade activity and therefore "business": Evans v FCT. "Carrying on business" implies a certain degree of continuity. R&D is a lengthy process, not just a one-off transaction. The alleged partners registered the business name "Frost Explosion" (FE) indicating an intention of ongoing business. An undertaking aiming to develop only one piece of technology would still be "carrying on business", as even single venture undertakings can be subject of a partnership: Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd; Minter v Minter; Mann v D'Arcy. “In common” - All three have a say in and contribute to the business (Faziah: development, Toshome: testing, Agnes: provide capital). Faziah is not just a manager as in Re Fisher & Sons or an employee like in Nationwide Building Society v Lewis. Although Faziah is a "salaried partner", she is a true partner because of her conduct and the circumstances of the case that are similar to Stekel v Ellice. They are mutual agents; not only can Faziah enter into contracts on behalf of the partnership, Toshome and Agnes can negotiate on behalf of the partnership too, as evidenced by the talks with Balloonabong. Therefore, a mutual agency exists like in Lang v James Morrison. They also share profits and operate under a registered firm name. Therefore, they do business in common. They plan to sell s and retire as millionaires, evidencing a "view to profit".

Their relationship meets all elements of the definition and is therefore a partnership. This is not changed by the fact that Agnes is a silent partner. Can argue Toshome is employee or Agnes is creditor: s2(1)(c)(ii) and (iii) PA but the circumstances here indicate that she is a real partner. Faziah's departure doesn't end the partnership, as no termination notice was given and the partnership was not limited in time: see Sections 26 PA (retirement) and 32 PA (dissolution)). b) Prohibition of private profits S29(1) PA provides that every partner has to "account to the firm for any benefit derived without the consent of the other partners from any use of the partnership property, name, or business connection." This means profits made directly or indirectly through the partnership's business should belong to the firm. Faziah didn't disclose her dealings with NitrO (see also s28 PA) or obtain an express consent from Toshome and Agnes. Consent for making private profits requires a full prior disclosure to the other partners: Birtchnell v Equity Trustees. Faziah might argue that she was told to "forget SST project", but this doesn't imply that her partners were aware of or did consent to her dealings. Therefore, Faziah acted without consent. Faziah acted on her own behalf and became a shareholder of NitrO. Her shares are valued at $300,000 constituting a benefit. Faziah's know-how in adapting SST and BFL is derived from her work with Frost Explosion. She used business connections derived from her position in Frost Explosion for her dealings with NitrO. Alternatively, Faziah might argue that SST was her idea and developed in her time. But from the facts, it's clear that SST is a spin-off idea of a firm project and it is likely that she used firm resources and business connections to advance SST. Faziah took advantage of an opportunity that belonged to the firm and therefore breached her duties under s29: similar to Birtchnell v Equity Trustees. Faziah's duties endure even if the partnership would have been terminated after Toshome and Agnes decided to sell BFL: Chan v Zacharia. c) Prohibition to compete S30(1) PA prevents partners from carrying out any business of the same nature and competing with the firm without the consent of the other partners. We have established above that Faziah didn't have consent regarding her dealings with Fast Steel. Fast Steel and Frost Explosion both develop snowboarding R and D; their businesses are therefore truly "of the same nature": see Glassington v Thwaites, where morning and evening papers were considered as business "of same nature" or

"within the scope” of the business: Aas v Benham. Also, there must actually be competition: Goldberg v Trimble. The firms most likely target the same market as we have no indication of the opposite. Snow equipment is generally marketed globally. Therefore, the businesses are competing in the legal sense and Faziah breached her duties under s30 PA. d) Remedies available to Toshome and Agnes Faziah has breached her duties under ss29 and 30 and has to account for and pay over to Frost Explosion all profits she made with NitrO. We don‘t know whether the PA allows dissolution by notice (s32) or what it provides regarding retirement (s26). If Toshome and Agnes want to get out of the firm and secure a share of Faziah's profits, they'd have to apply for dissolution by the Court following s35(d) PA. Making secret profits is a breach that is likely to destroy the mutual trust and confidence of the partners: Erickson v Carr. There's no indication that Faziah will change her behaviour. Toshome and Agnes can seek a court order for the firm's dissolution and an injunction stopping Faziah's dealings with NitrO. Conclusion The relation between Faziah, Toshome and Agnes is a partnership. Faziah breached her fiduciary duties under ss29 and 30 PA, therefore she has to account for and share her profits ($300K) with the firm. Toshome and Agnes could apply for dissolution of the partnership and an injunction preventing Faziah from continuing her dealings with NitrO.

3. LOOK@ME Kath and Kim decide to commence a billboard business. They decided to enter into a partnership arrangement and formed "Look@Me", a business that provided billboards and related services to advertising agencies. They agreed to share all profits and losses equally. Look@Me won a lucrative account to supply and construct a billboard on the corner of Matherson and Thomas Roads. Unfortunately, the billboard installed by Kim is not secured and falls, injuring Kel who was waiting at the adjacent bus stop. The incident occurred before Kath and Kim had had the opportunity to arrange public liability insurance. Kim has owns no assets of objective value. Advise Kel whether she has any rights against the partnership and/or Kath and Kim?

Answer: Issue The issue is the liability of partners (Kath and Kim) for tortious actions. Rules S 10 of the Partnership Act 1891 (SA) ("PA") provides that the firm is liable for any loss or injury caused by any wrongful or omission of any partner in the ordinary course of the business of the firm to the same extent as the partner so acting or omitting to act. S 12 PA provides that every partner in a firm is liable jointly and severally with the other partners for liabilities of the firm under s 10 PA. Application Based on the facts we can assume that there is a partnership. Not securing the billboard sufficiently is a wrongful omission to act - all constructions have to be secured from falling over and hitting people; goods have to be safe for consumption – a breach of duty of care to the public: Donoghue v Stevenson. As the core business of the Look@Me partnership is providing billboards, the wrongful omission took place in the course of ordinary business. It doesn't matter whose job it was to secure the billboard or to arrange public liability insurance. Therefore the firm is liable for the injury Kel suffered. If the partnership is not able to pay the damage caused, Kel can sue Kath and Kim individually or together for the full amount as they are both jointly and severally liable. For instance he could choose to sue only Kath. Conclusion Kel has the choice of suing either Kath or Kim or both together.

4. ADVENTURERS FOREVER In 1997 Aragorn, Legolas, and Gimli decided to open a costume hire store, specialising in high quality fantasy fancy dress. They called their store "Adventurers Forever". Aragorn owned a building in the inner city, suitable for their needs. Legolas supplied the dress making equipment for the creation of the costumes and Gimli owned a fabric mill, so he provided the fabrics. They agreed to share the profits and losses equally but did not think it was necessary to enter into a written partnership agreement. The business was a raging success and after four years they used some of their profits to buy another property in the suburbs near Norwood Parade and opened another store. A few months ago they sold the business and dissolved the partnership. The sale price reflected the fact that in comparison the value of the two properties has increased much more than the value of the machinery and stock. a) Advise Aragorn, Legolas & Gimli as to which assets are partnership properties b) Explain how the proceeds of the sale of the business will be divided; advise in particular whether Aragorn is entitled to that part of the sale price that is attributable to the increased value of the building in the inner city

Answer: Issue The question here is whether the property brought into the partnership by each of the partners and the property bought later on near Norwood became partnership property. Rule(s) ss20-22 PA (Basic rule is that all property brought into a partnership is partnership property and that property acquired from partnership proceeds is also partnership property) ss39 and 44 PA (If the properties are partnership property, then they would be sold when the partnership is dissolved and the proceeds would, after debts and liabilities are paid, be divided among the partners in the same proportion as they are entitled to share profits) Applicatio...