Andrew and Celeste whether the relationship is a partnership
In the case of Andrew and Celeste the issue is whether there exists any partnership relationship that binds Celeste when she says she will not pay for any of the exotic raw ingredients purchased by Andrew and that she will also not be responsible for any losses that the business suffers as a result of 'experimenting' with Andrew's new menu
According to the Australian Partnership Act 1891, 'Formation of partnership in business occurs between 2-20 persons with a common goal of making profit
However, the relationship of the persons must:
a) Incorporated under the Corporations Law; or b) Formed or incorporated by or in pursuance of any other Act of Parliament, or letters patent, or Royal Charter:
In this case, the following rules determine the relationship that exists between Celeste and Andrew.
In determining the existence of a partnership, the following rules apply.
a) Joint tenancy, tenancy in common, joint property, common property, or part ownership does not guarantee formation/existence of partnership
. This is regardless whether the partners' shares/do not share the profits generated by the property.
b) Sharing of profits and losses does not constitute formation of partnership, regardless of whether the individuals concerned share gross returns, or whether there exists a have a mutual or common right or interest in any property that derives the returns
c) The sharing of returns by any of the partners is prima facie that the individual is a partner; however, sharing of the returns is not a guarantee that the person is a partner in whatever case.
d) The receiving of debt or any liquidated amount by a person, in terms of installments or any other means from the accrued profits does not form partnership relationship/nor any liability whatsoever
e) Contractual agreement to pay for services rendered by a person on behalf of a person engaged in other business activities by a share of the returns does not make the contracted person a servant or partner in the business.
f) An individual whether the husband/wife/child of a dead partner benefiting from the share of profits does not become a partner by virtue of sharing the profits on behalf of the deceased partner.
g) A loan advanced to the business by way of writing by the lender with a contractual agreement that the lender will enjoy an interest rate varying with the returns does not make the lender a partner in the business
Case law - Hitchins v Hitchins and Another (1998) NSW Lexis 2382; 47 NSWLR 35
This case involved Partnership between a various groups of people in a restaurant. A sister and a brother formed one group. There was a disagreement pertaining to the sharing of the profits, whether the relationship existing between the partners was pursuant to the Partnership Act 1890. In the ruling, the Supreme Court of New South Wales, Bryson J. relied on s 1(1) of the Partnership Act 1891 (the equivalent of the Partnership Act 1890). It provides that the partnership is "the relation which exists between persons carrying on business in common with a view of profit," s 2 (1) of the Partnership Act 1891
. In addition, the sharing of gross returns does not of create a partnership whether or not the persons have a common interest in the property from which the returns are derived
Based on the statutory provisions mentioned above; the court ruled that the activity of the three, that is, investing in a share in the hotel business and receiving returns from it, did not amount to the carrying on of a 'business in common'. Rather, the court termed the activity as a mere business investment because it lacked the elements of engaging in trade or a flow of transactions, which comprises the functioning of business. The jury ruled that though the Hitchins were clearly partners in the hotel partnership, they were not partners in a separate partnership yet the business was a joint ownership of a share in the hotel partnership.
Although, the relation between Andrew and Celeste does not fall in the definitions that explain the existence of partnerships, the relationship between the two friends is fiduciary. On the grounds of, inter alia, these persons were close friends, and based on equitable principle 'equality is equity' Andrew should provide the money to buy the exotic ingredients and accept the sharing of the returns. Contrary to that, where one of the partners conducts the operations of the business that varies with the usual course of business operations, the firm is not liable for the losses incurred. Liability occurs only when the partner involves the consent of the other partner (s). In this regard, Andrew will be responsible for any anticipated losses in the firm. This is because the business dealt with perishable products, but Andrew had the idea of changing the menu. Therefore, any loss that may result from his innovative idea is a personal liability. However, based on the responsibility of partners for private profits, every partner is responsible to the firm for any profits derived by the partner without the authority of the other partners. This means that the Act entitles partners to share any benefits derived from any transactions carried out by partners without involving all the partners. Based on this Act, Celeste is entitled to the sharing of the returns derived from any business transactions.
Question 2: rights or responsibilities of Andrew and Celeste
Issue: In the case of Andrew and Celeste, the issue is whether the two have any rights or responsibilities regarding their relationship in the business in terms of sharing the returns accrued from the business.
Authority of partner to bind the firm
Every partner has a duty and responsibility in the firm pursuant to the objective of the partnership business. Therefore, the acts of every partner who acts contrary to the usual operations of the business is liable for any losses incurred, unless the partner so acting has in fact no right to act for the business in the particular issue. In addition, the Partnership Act binds the person if the individual whom the person is dealing either knows that the person has no right, or does not know or believe the partner to be a partner.
Partners bound by acts on behalf of firm
Any act or instrument pertaining to the business of the firm and performed or carried out in the name of the business, or in any other way indicating a purpose bind the firm, by any person authorized, whether a partner or not, binds the firm and all the partners.
Liability of partners
Partners in a partnership business are jointly liable for all debts and obligations of the business incurred while the partner is a partner; and after the partner's death, the partner's estate is also liable in the sharing process for such debts and obligations, as long as they unsatisfied, but considering the prior payment of the partner's separate debts.
Liability of firm for wrongs
Pursuant to Partnership Act 1891 subsections (2), any wrongful act or omission of any partner acting in the due course of the business of the firm, or with the power of the partner's co-partners, any injury or loss incurs, the firm is liable for the loss, injury or penalty.
In addition, subject to Subjection 1, a partner who commits a wrongful act or omission as a member of the governing body of a body corporate is not said to have committed any wrongful acts based on the following:
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 member of the governing body;
b) Remuneration that the partner receives for acting as a member of the body corporate forms part of the income of the firm;
In our case study involving, Andrew and Celeste; Andrew acted without the consent of his partner, and therefore, Celeste has a right to refuse any liabilities incurred because of misapplication of funds relating to their business. A partner is bound by the Act on misapplication of business funds based on the following grounds.
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) Where a firm in the due course of operating the business receives money or property of a third person, and the money or property received is misapplied by one or more of the partners while it is in the custody of the firm
In addition, under section 10 and 11, partners are liable mutually with the partner's co-partners, for any business activities conducted on behalf of the firm, while the partner is a partner of it, becomes liable. The partnership Act provides rules that define the partners subject to special agreement, which Andrew may rely on. They include: