business together called Finance R’Us. Their plan is to provide different types of financial advice to their clients. Julio specialises in tax advice, Carolyn has a passion for accounting and Trisha knows the ‘ins and outs’ of investment.
In order to save money, they decide to keep it simple and just write down some rules of their agreement on a serviette. They write that they agree to put equal money into the business and to share the profits equally, and that everyone will be involved in the management of the business.
Still they are a bit short on money so Julio’s sister, Sarah, is happy to come in and provide a loan of $40,000 for which she will receive 2% of the net profit over 5 years. She is only interested in helping her brother and his friends out, she is more of an artistic nature and thus not interested in the business.
They start their business, which is to provide bespoke financial services. It becomes very popular as all three are very passionate and know their finance areas well.
1) Under what type of business structure is this business running? Furthermore look at everyone who might be involved in this business, i.e. Julio, Carolyn, Trisha and Sarah and discuss their status in regards to the business. Give reasons for your answer; in particular support your answer by citing relevant cases and statutes. (10 marks) Julio advises a client, X, in writing on the tax implications of the purchase of a certain real estate property.
Unfortunately, Julio made a mistake in his advice as he was not on aware of the latest ruling by the Australian Tax Office (ATO). Because of this error, X had to pay an extra $15,000 in tax because the advice was incorrect.
2) Discuss whether Julio and/or his business partners are liable for the damages suffered by X? Please make sure that you only assess the legal risks under contract. Also support your answer by citing relevant cases and statutes.
Without the knowledge or permission of Julio, X had passed on the written tax advice to his best friend Y. Based on the advice, Y decided to purchase a property as well. Naturally Y had to pay an extra $15,000 in tax.
3) Discuss whether Julio and/or his business partners are liable for the damages suffered by Y? Please make sure that you only assess the legal risks under tort of negligent misrepresentation. Also support your answer by citing relevant cases and statutes.
In order to manage their business risks better, Julio, Carolyn and Trisha want to make changes to how they are operating their business.
Introduction and Definition of Business Law
Business law can be defined as a regulatory body of law responsible for the simultaneous governance of business and commerce in a standard manner. This body of law is generally considered to be a branch of civil law which deals with the issue covered under the private law as well as public law (Beatty, Samuelson and Abril, 2018). The present study is based on assessment of given business case study of Julio, Carolyn and Trisha. Study will cover appropriate legal provision and case studies to resolve the concern business issues. The study covers, business structure, status of parties involved in business, their individual and joint liabilities and recommendations for further improvement.
A partnership is considered as a group of individuals who run a business and share profit and loss among themselves. For instance, if a person and its friend or family member makes decision on establishing a business, then it will be considered as a partnership structure. The concept is believed by James LJ in Smith v Anderson (1880) 15 Ch D 247 at 273 in a way that a general partnership means a partnership where there is composition of individual operating together by agreement among themselves to run a business together for a mutually decided period of time, and it is generally compiled of individuals truly entering into agreement with each other (Partnership, 2018). In the cited case, the partners are running a business structure of partnership, wherein Julio, Carolyn and Trisha are the real partners and they made a decision to enter into an agreement and share equal amount of profit and loss amongst them. The partners distribute revenue, losses, business control and ownership. For the existence of partnership, it is not vital to form a written agreement, but emergency or situations it must be formed to show the viable, true and actual existence.
An agreement of partnership must show how profit and loss will be shared between the partners and the ways by which there will be control over the business. Further, a partnership agreement can assist in avoiding any confusions, conflicts and misunderstandings regarding the facts which every partner bring into the structure of partnership and what they are allowed to obtain from the business revenue (Carr, 2016). This is predominantly significant for the tax entitlement or purposes if income or losses are not shared between partners on an equal and fair basis. The partners who entered into a partnership are not considered as employees, but they can recruit employees under them. Furthermore, the structure of partnership is also not a separate entity, and not similar as a sole trader, in this structure all the partners are responsible for the business debts and due amounts.
Partnership Structure and Agreement
This is also proved by the case reading of James LJ in Smith v Anderson (1880). As per this case Julio, Carolyn and Trisha decide to bind together for working for common objective by sharing profit and losses.
As to provide with any individual related in the business with partnership is said to be a partners, and the guidance on the same is held under the in s.6 of the Act, and various rules are provided alongside. The most general rules are described as below:
- Joint ownership: According to the Rule 1 - s.6(1) it is given that there should be presence of joint-ownership. This is easy to understand but the only fact is that individuals might be joint-tenants or having an ownership not solely forms a partnership(Elliott and Varuhas, 2017). Classically, each and every rule must be satisfied to enter into an actual partnership.
- Participation in gross returns: On a general basis, partners must distribute gross-returns in accordance with their agreed share within the business. Hence, in a situation where individuals distribute the gross-returns, then it would be real to say the existence of partnership on fair basis (Partnership, 2018). On the other hand, the same has been complicated by rule 2- s.6 (2), it states that the mere distribution of gross returns will not form a partnership. Regardless of all these facts, distributing gross-returns is a powerful sign of a partnership, especially when there is prescription of a set of percentage within the agreement.
- Profit distribution: In accordance with the Rule 3- s 6(3), it is been provided that the distribution of profits is prima facie evident that there is existence of partnership. On the other hand, it is not sated as definite. There are two instances cited in which an individual is entitled to a share but it was not stated as partners in which the same individuals is a creditor or by virtue of s.6(3)(b) in which the distribution of profits is just compensation or wage. As noted in the instance, under s.28 (6) it is stated that however partners are permitted to remuneration and hence they gain remuneration on the basis of prima facie, they might be difference by the contract of partnership(Davidson, Forsythe and Knowles, 2015). Hence, obtaining remuneration does not exclusively sign in opposition with a partnership.
- Loss distribution: It is concerned by Rule 3 – s6 (3)that states that in partnership there must be equal distribution of profits. In addition, it is been explained by Section 28 that each partner should make contribution towards the business losses in an equal manner.
- Practising partner rights: Usually, when a partner is engaged with partner right and exercise them in full power, then only they will be said as active partners. It is more expected that a partnership can be attributed(Gullifer and Payne, 2015). Generally, where a person exercises those rights that would typically be exercised by a true partner, the more likely a partnership can be imputing. Section 28 includes a non-exhaustive list of partner’s rights.
The High Court was experienced with the same problem in the Canny Gabriel Castle Advertising Pty Ltd &Anor v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321. In other terms, it is clear that the agreement highlights all the signs of a partnership, exclusive of one that it does not depicts the parties as partners and have not offered the distribution of profits, however, business projects to think on the same implied situation.
By considering the case reading of Canny Gabriel Castle Advertising Pty Ltd &Anor v Volume Sales (Finance) Pty Ltd (1974), Julio, Carolyn and Trisha are partners as they satisfied all the characteristics of partnership that is to having joint ownership, sharing in profit and loss and having all accessible rights of a partner. On the other hand, Sarah is mere loan provider. As per the case reading, mere profit distribution characteristic is not sole basis to determine the status of a partnership. In the concerned case, Sarah’s interest is to help her sister out, and she is entitled to profit in the form of interest instead of having any other interest in the business.
All partners are said to be the agents of business and their other partners for the intention of the partnership business and the acting and actions of every partner who conduct any actions for running the business in a general way, which is carried out by the business in the same way then the firm is bounded with firm and partners, unless and until the partner’s acting has no power to act for the business in a specified manner and the individuals with whom the partner is engaged in dealing, is known to that fact that they have no power or are not-known or believed to be a partner (Llewellyn, 2016).
The vital characteristics under the section, is that any of the activities carried out by a partner for the intention of the business partner, will further bound other partner, unless and until the external party has the information that the partner does not possess any power to carry business act in a specified way or is not aware that the individual is known or believed to be a partner (Jones, 2017).
Professional liability refers to a term that can be put in place to depict the liability that professionals possess for any action or error that is against or in contravene of the duty of carer owned or entitled to them. Another name for Professional liability is professional negligence. Further, the possible liability is to offset any damage or conflict caused by negligence (Professional Contractors and Consultants Australia, 2017). This harm can come in the form of physical injury (for instance negligently developed platform failing led to a broken leg) or an economic loss (for instance loss of money held by an individual who grants money in the relation of a valuation of negligent on the proper for loan security) (McKendrick, 2014). Business and partner can ask for compensations for the faced harm or loss due to the issue in a product, in a situation where the supplier can have addressed the issue reasonably. Also, this will replace, refund or repair the actual rights.
Partners as Agents and Liability for Actions
This scenario was depicted by Tindal CJ in Wilson v Tubman (1843) 6 Man & G 236 at 242; 134 ER 879 at 882 as under:
An act carried out by an individual, not supposed to act for oneself, but for another individual, with the absence of precedent authority, turns out to be the act of the principle if corrected by the individual, is the recognized principle of law (Latimer, 2011).
Rectification can be imposed and applied where there is the liability of principle for the act which has been corrected. In the context with the partnership, it is termed as where the actions of the individual that have been corrected by co-partners and then the co-partners will be fully liable for the same act. The “Partnership Act” is inclusive of other action which controls the dealings of a partner with externals. This section is inclusive of partners bind by the actions carried out on behalf of the business. It is provided by Section 6 that, an act related with the business, and carried out in the name of the firm, reflecting a purpose to bound the firm by any individual been authorized, if or if not a partner or not, is bounded on the firm and partners (Milsom, 2014). Given that this section will not impact general law rules regarding the implementation of agreements. This sections is referred as those acts that are carried out with the purpose of binding the firm and thereby shall bind the firm.
By considering the above case, it can be said that all the partners will be responsible for the loss, as the loss was made according to the decision of all partners and all the partners were engaged in the act which resulted into a business loss. Further, according to the Partnership Act, it is clear that if the act or conduct of partners holds the loss or damage, and all the partners are involved in the same, then the loss would be fully entitled to them. They have to mutually and strictly share the loss and are liable on the same. Hence, Julio and all the associated business partners are liable for the damages suffered by X.
In the case study of Wang v Rong [2015] NSWSC 1419 the problem was if or if not Wang, Rong and Zhang were mutually and strictly responsible for the Partnership debts (Partnership dispute: Wang v Rong [2015] NSWSC 1419, 2016). The court further declared that all the three involved partners are mutually and strictly responsible for the debts in their partnership structure.
Professional Liability and Negligence
Any person who grants advice to another person or either offers a service of a professional character as per a set discipline can be defined as professional. Further, a professional is only responsible for offsetting to those who have the entitlement to the duty of care by the professional (Storey, 2016). Generally, a professional will be found to be obliged to a duty of care to all the individuals whom the professional shall foresee can be damaged or experienced losses reasonably by a negligent action or error.
There are three core fundaments to set negligence, first and the most important is that there should be the presence of amongst the parties, next the professional must never practice the needed standard of care leading to omission and the last is the omissions causing damages to the other related parties to correct and fix the omission. If there is the absence of these three fundaments being set, it is not possible to establish a claim for harm, injury or loss. An act would not be negligent due to the extraordinary capabilities of professional (KEY ASPECTS OF THE LAW OF CONTRACT AND THE TORT OF NEGLIGENCE, 2018). On the other hand, it would be negligent, in case the work declined below the competence level. The extent of care needed will be based on the possible loss risk and the reasonability of the avoidable measures that are required to be considered.
In relation to the Caparo Industries plc v Dickman (1990) the shareholders in a corporation are said to be shareholders, and the auditors of corporate are defendants.
Capario is the case taken into account by keeping professional negligence in mind. The standard of care meant for professionals is of the practical retaining of themselves from as possessing the capabilities in question (Kubasek and et al., 2015). On other helpful case is the Victoria Laundry v Newham Industries (1949), wherein the delay of defendant led to the loss of profit by the defendant, inclusive of the loss of an abnormally profitable agreement (Kubasek and et al., 2015). Further, the defendant was responsible for the loss as per the first limb of the Hadley test, expect from the loss of that specified agreement. The defendant would be only responsible for the aware fact at the time of the formation of the contract.
The court put a reference to the remarks of Lord Halsbury in Adam v Newbigging (1888) 13 App Cas 308, wherein it was stated by Lordship that:
Caparo Industries plc v Dickman
If there is existence of partnership, a community of interest in the act been conducted, or actually without the cover-up of name, verbal equal for the regular stages of P&L, indirect method for imposing control on the act will avoid the actual occurrence of transactions been adjusted as a partnership, for this phrasing by draftsmen will not prevent the legal outcomes of the contract.
In the case of Cox v Hickman (1880) 8 HL Cas 268; 11 ER 431, Stanton Iron Company wherein B and J Smith were trading in a partnership structure, faced financial complexities. The court found that there was no holding of Cox and Wheatcroft being as partners, and Hickman was not aware of them or managerial deed. Cox, as well as Wheatcroft, could refuse liability in spite of the fact that they are creditors and are enforced to share rateable profits. By considering this factor, Julio is solely responsible to the Y for the occurred damages. As other partners were not aware of the action of Julio and it was outside the scope of partnership, therefore, firm or other partners will not be liable for this deed of Julio.
By considering the above case and scenarios, some beneficial and helpful recommendations are drawn below to assist the partners in rectifying the situation:
- It is recommended that the business and partners are required to find the most appropriate strategic partner with extraordinary and professional skills, and who have the full knowledge of acts and what actions are required to be done to prevent damages. It is important that every partner is aware of the latest rulings and acts so that they can make decisions and carry acts by the same. Partners must be cautious and carry every action after considering their impacts and consequences
- Partners are recommended to make use of business structures in a manner to regulate the legit practice. Obligation to manage professional as well as ethical rules must be put in place and made accessible to partners, and should be free to opt from the most suitable business structure.
- As seen in the above case, the partners did not possess a formal or written partnership agreement due to which they suffered from conflicts. It is essential to form a written agreement before entering into a partnership to avoid any kind of conflict or loss. It is very important to have an appropriate agreement in place to set precise partnership agreements documented by lawyers. The aim of the partnership agreement is to secure the partner’s investment within the business, managing the governance of business, clearly defining the rules and rights of the partners and identifying the involvement rules of partners. A written agreement will minimize the risk of conflicts and misunderstanding among the owners. A written agreement helps business partners in many ways, as it avoids the default rule of the state, and by this partners will also have full control over the business, agreement on significant issues would be easy also it facilitates in eliminating disruptive aspects while protecting the investment of all business partners. Further, it is strongly recommended that partners must place written partnership agreement to highlight business ownership and duties of each partner.
- The business partners can move on to the structure of the company; it is because partners will not be responsible for the debts of the company, and there be no restriction and bind on them. Also, this business structure will ensure ownership of company on a full basis.
Conclusion
In accordance with the present study, conclusion can be drawn that business structure of partnership has several pros and cons. Therefore, individuals are recommended to have a proper analysis of available business structure before the selection. The present case study shows that individual is considered to be a partner if all characteristics are satisfied properly. Further, partners are joint as well as individually responsible for their actions thus they are required to operate ethically along with considering their professional responsibilities. However, there is an exception to this rule in a case where any partner operates outside the partnership then the firm will not be having joint responsibility for the same. For having a better-operating structure, partners are required to comply with the cited recommendations to improvise their overall governance.
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