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Partnership Structure and Elements of Partnership

Discuss about the Foundations Of Company And Commercial Law.

Which business structure has created between Julio, Carolyn, Trisha and Sarah and the status of each party?

Parties have to select a business structure while performing the operations of a business in Australia. The partnership is one of the most common business structures which parties can choose if a business is started by two or more parties. Regulations regarding this structure are given under the Partnership Act (Vic) 1958. The definition of the structure is given under section 5 of the Act which provides that it is defined as a relationship between two or more parties which carry on a business in common and the goal of their business is to collect profit. In order to form a partnership, certain elements are required to be fulfilled by parties such as carrying on a business, in common, and the goal of the business must be to collect profit. The parties of a partnership must carry out the business of the partnership.

In Mann v D’Arcy case, it was held by the court that agreement between parties to perform a single event which will not be repeated in the future could not be constituted as a carrying out of business. While carrying out the business of the partnership, partners must perform its actions in common. In Strathearn Gordon Associates Ltd v Commissioners of Customs and Excise case, it was held that business which is not carried out together by partners could not form a partnership. The partners must have a goal to collect revenue by performing the operations of the business. Each of these elements is required to be present in order to form a partnership. A good example was given in Plummer v Thomas case. In this case, profits were equally shared by partners, but there was no provision to share the loss. The court held that a partnership had not been constructed between the parties.

Julio, Carolyn and Trisha decided to start a business by equally sharing its profits and losses and performing different operations in the business. Each member is performing different operation in the business, for example, Julio is tax advisor, Carolyn is managing accounting and Trisha is an investment advisor. They are running the business together, and their goal is to collect profit. Thus, Julio, Carolyn and Trisha have entered into a partnership structure, and their status in the business is of partners. On the other hand, Sarah is not interested in the business, and she is not running its operations along with other partners. However, she is sharing the profits of the business, but, as given in the judgement of Plummer v Thomas case, only sharing of profits did not make a person partner. Thus, Sarah is a creditor of the business rather than a partner.

Contractual Liability for Partners

Conclusion

In conclusion, a partnership has formed between Julio, Carolyn and Trisha and each of them are the partners of the business because they fulfil the elements of a partnership. Sarah only shares the profits, but, she did not fulfil other elements of partnership due to which she is a creditor of the business.

Whether X can file a suit for damages against Julio and other partners for the loss suffered by him?

While giving advice to another party, it is necessary that a standard of care is maintained by the party which any reasonable person would in such situation in order to avoid a loss to another party. In case another party act on the false statement of the party due to which he/she suffered an injury, then a claim for misrepresentation can be filed. It is referred to a false statement which is made by a party regarding any fact, and another party suffered an injury due to reliance on such statement. There are three types of misrepresentation which include innocent, negligent and fraudulent misrepresentation. In order to claim for damages in a case of misrepresentation, the claimant is required to prove certain elements. Firstly, the claimant is required to prove that the defendant has made a false statement regarding a fact and such statement must not be an expression of opinion or estimation of facts. Contractual liability for damages can occur in case the party rely on the false statement to perform an act which resulted in causing damages to the party.

A good example is given in the case of Hedley Byrne v Heller. In this case, the court held that a person who owed a duty of care should ensure that he/she did not make any false statement which could cause an injury to another party. In the case of Smith v Land and House Property Corp, the court provided that a person can be held liable for making a false opinion or estimation if he/she is in a position to know about the true facts. While giving professional advice, the person should ensure that appropriate care is taken by him in order to avoid injury to another party as given under section 59 of the Wrongs Act 1958. A good example is given in the case of Rogers v Whitaker. In this case, a doctor failed to advise the patient regarding the risks which are linked with the treatment which any reasonable person would do in such situation.

Negligent Misrepresentation and Liability for Partners


The patients suffered injury due to lack of warning by the doctor based on which the court held the doctor liable for misrepresentation because a contractual liability has raised in the case as the doctor owed a duty of care. In case of a partnership, the liability of partners is limited, and they can be held liable for the actions of other partners. Section 9 and 13 of the Act provides that partners have contractual liability and the third party can hold the partnership liable for the action of a partner. It provides that if the partner is acting within the scope of his/her authority and it is business as usual, then other partners would be held jointly liable for the actions of the partner. In the case of Walker v European Electronics Pty Ltd, a firm of chartered accountant was held liable for the actions of a member who was acting within the ordinary course of business and acting within the scope of the business.

Julio is reasonable for giving tax advice to the client of the business. He gave tax advice to X based on which X invested in real estate property. However, Julio did not have information about the latest regulations which were implemented by the Australian Taxation Office (ATO). Due to such regulations, X had to pay extra $15,000 as the tax of such property. Julio is the tax advisor of X, thus, he owed a duty of care to X. He made a false statement, and X relied on such statement due to which he suffered loss, thus, a suit for misrepresentation can be filed against Julio. Julio was in the position to know the fact as he was acting as a tax advisor in the partnership, thus, the judgement given in Smith v Land and House Property Corp applied to this scenario as well. Furthermore, Julio was acting within the scope of his authority, and it was business as usual, thus, as per the judgment of Walker v European Electronics Pty Ltd case, X had the right to file a suit against Julio and other partners and held them jointly liable for the loss suffered by him.

Conclusion

In conclusion, Julio and other partners are liable to pay damages to X because he suffered loss due to misrepresentation of Julio based on which the contractual liability of Julio and other members has raised.

Whether Y can file a suit for damages against Julio and other partners for the loss suffered by him?

Negligent misrepresentation is defined as a false statement which is made by a party to another party who suffered injury due to reliance on such statement. As seen above, if a partner is acting within his/her scope of authority and it is business as usual, then the aggrieved party had the right to file a suit against the partnership and held all partners jointly liable for the damages. While filing a suit for negligent misrepresentation, certain elements are required to be fulfilled without which the aggrieved party can not file a claim. In Mercantile Credit Co Ltd v Garrod case, the court held that a sale which is authorised by a partner comes under the definition of business as usual based on which other partners can be held jointly liable. In the judgement of National Commercial Banking Corporation of Australia Ltd v Batty case, the court held that actions which are outside the scope of a partner’s authority and which does not come under the definition of business, as usual, cannot hold another partner jointly liable. Another important case which applies in this scenario is Esanda Finance Corporation v Peat Marwick Hungerfords case. In this case, a party provided a loan to different companies based on the auditor’s report and the auditor accounts of the main company. Later a suit was filed by the company against the auditor for misrepresentation of facts. The auditor argued that its duty is limited to the company which is audited and it did not owe a duty of care to the third party who relied on such statement. The court agreed with the arguments of the auditor and provided that no duty of care is owed by the auditor to third parties.

Julio is the tax advisor of X, and he provided false advice while acting within the scope of his authority based on which Julio and other partners are jointly liable towards X as it was business as usual. X gave the same advice to Y, and he also suffered a loss of $15,000. However, Julio and other partners cannot be held liable for the loss suffered by Y because they did not owe a duty of care to Y. Julio was not acting as the tax advisor of Y, and he did not owe a duty of care to him. As per the similar judgement provided in Esanda Finance Corporation v Peat Marwick Hungerfords case, Julio and other partners cannot be held liable for the loss suffered by a third party who relied on the advice made by Julio without his knowledge. Julio and other partners are only liable for the damages of X and Y cannot file a claim against the partnership for negligent misrepresentation.

Conclusion

In conclusion, there is no duty of care owed by Julio towards Y because he was not acting as his tax advisor. Therefore, Y did not have the right to file a suit against Julio and other partners to hold them jointly liable for the loss suffered by him.

What options does Julio, Carolyn and Trisha to ensure that they manage their business risks more effectively?

In a partnership business structure, partners could communicate with each other and change their business structure by making changes to their partnership agreement. In order to make changes in the liability of partners, each partner could change the terms of the partnership by mutually making changes into its terms. Parties of a business can change their business liability by making changes into their ways of operating the business. Furthermore, parties have the option to change their business structure in case they wanted to change their business liabilities. Parties can choose from different structures such as a sole trader, trust, and company. A sole trader is a sole entity who operates a business on his/her own. There is no separate personality of the business, and the owner is liable for all the debts of the business. The formation of this business is relatively easy, and there are not complex legal requirements, but only one person can operate this business. In a trust, a trustee holds property on behalf of a beneficiary.

The trustee is liable for the property, and he/she collects the benefits of the property for the beneficiary. It is easy to define the responsibility of trustee by making changes in the trust deed; however, its formation is complex because parties have to comply with a number of legal requirements. In order to avoid these issues, parties form a company which has a separate personality from its owners as given in the judgement of Salomon v Salomon & Co Ltd. It is divided into two types which include proprietary and public company. The shares of a public company are freely transferable, and they can be bought and sold by parties on the stock exchange. On the other hand, a proprietary company have limited number of membership (50 people), and its shares cannot be listed on the stock exchange. A company has rights and duties as humans, and it can hold property under its name. It can sue or be sued by other parties because it has a separate legal entity in the eyes of the law as given in the judgment of Lee v Lee’s Air Farming Ltd case.

Julio, Carolyn and Trisha can select between three options in order to manage business liability more effectively. They can make changes in the way they provide written advice to their clients in order to manage their risks. While giving advice in written paper, they can add a disclaimer for their clients which specify that partners could not be held personally liable in case the party suffers any loss by acting on such advice. By this way, Julio, Carolyn and Trisha could protect themselves from legal suits while giving written advice to their clients. They can also decide to mutually make changes in their partnership agreement for making responsibilities clearer. Currently, they did not have partnership agreement which specifies the responsibility of each partner. They could construct a partnership agreement in which they can clearly mention the responsibilities of each partner based on which they can protect themselves from legal suits which are filed by parties due to the fault of other partners. They also have other option to change the structure of their business. A sole trader and a trust are not suitable options for Julio, Carolyn and Trisha, instead, incorporation of a proprietary company is a suitable option for them. After formation of a proprietary company, the liability of Julio, Carolyn and Trisha will be limited, and they did not have to face the risk of the business. They would not be held liable for the actions of other partners, and third parties cannot file a legal suit against them.

Conclusion

In conclusion, Julio, Carolyn and Trisha should form a proprietary company which would assist them in managing their business risks effectively.

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[Accessed 27 February 2024].

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