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Conditions for a relationship to be treated as a partnership

Question:

Discuss About The Present Case That While Violet Is A Partner?

Issue: An analysis of the facts that are present in this question reveals the issue if the law allows Friendly Bank to the loan from Violet and Sonny. That was given to Busy Bee Florist Shop. For this purpose, it needs to be seen if both of them can be treated as the partners of Busy Bee Florist Shop.

Rule: The legal provisions that Ireland in the present case include section 1 of the Partnership Act. It has been provided by the Partnership Act that there are three elements that should be present in order to describe the relationship between the parties as a partnership. Hence if the parties are carrying on a business; in common; and for making a profit, the relationship between the parties can be mentioned as a partnership. On the other hand, even if one of these elements is not present, the relationship will not be considered by the law as it was mentioned. For deciding the question if the parties are 'carrying on a business' , it is required to be considered if there is some repetitiveness of action or even if a single action can also be sufficient in this regard. In a number of decisions that have been given by the courts on this issue, it has been stated by the courts that it is necessary that there should be some repetitiveness of action or continuity of action. An example in this regard can be given of Smith v Anderson, 1880. In this case, a group of depositors had made a decision to purchase the shares of different submarine cable companies. For this purpose, they have formed the trust. The trustees sold his shares these investors and provided them with certificates. Under the circumstances, the court was required to determine if this trust, amounts to a partnership or not. For deciding this issue, the court decided to look at the nature of the business and also the relationship that was present among the parties who were involved in the trust. In particular, the court noted the fact that the trustees have not been provided with the authority to speculate. In the same way, the trustees did not have mutual rights and obligations. In view of all these facts, and keeping in mind the nature of the trust, a conclusion was made by the court that the present case the trust cannot be described as a partnership. The reason behind this decision of the court was that there was no association present between the parties that can be described as 'carrying on business'.

Importance of the intention of the parties


The Partnership Act also provides the rules that can be used in order to decide if the relationship of the parties can be mentioned as a partnership. However, it is worth mentioning at this point that the decision if a particular relationship can be described as a partner cannot be made only by applying these rules. As a result, these rules alone cannot provide the basis for making the decision regarding a relationship to be termed as a partnership. Hence, the law requires that the court should consider all the circumstances that are present regarding the agreement concluded between the parties. As a result, the court has to find out the real substance of such an agreement (Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd., 1974). In the same way, the express, as well as the implied the intention of the parties is also important in this regard. For example, the court has stated in Wiltshire v Kuenzli, 1945 that it was the intention of the parties to do everything which makes them partners and as a result, the intention of going to which the parties should not be treated as partners, was invalid. In the same way, in Stekel v Ellice (1973), the defendant was an employee in an accounting firm belonging to the plaintiff. It was mentioned in the first agreement created between the parties in 1969, that the plaintiff was going to become a salaried partner and he will be given a salary. It was also mentioned that another agreement will be created by the parties. According to the segment, the plaintiff was going to become a full partner. It was also mentioned between the parties that the term of employment was in 1969. Similarly, only the defendant was going to be liable for the losses of the business. The latest agreement was never created by the parties, and they continued to operate in the same way till August, 1970 when the relationship between the parties broke down. The traditional left the business and also sought a declaration according to which the partnership has ended and the court should order the partnership to be wound up. After going through all the facts of the case, the court arrived at the conclusion that the relationship between the parties was a partnership and it continued even if the parties have not entered into an exclusive agreement (Exparte Coral Investments Pty Ltd., 1979).

Rules related to sharing of profits

 Another relevant provision is also present in the partnership Act. According to section 2(3) of the Act, it has to be treated as a prima facie proof of the fact regarding the presence of a partnership, when a person receives a share of the profit made by the business. However, it also needs to be mentioned that only the fact of sharing the profit made by the business or by receiving payment. That has been generated on the basis of the profit made by the business is not the only effect on the basis of which it can be claimed that such person is a partner in the business (Television Broadcasters Ltd v Ashton’s Nominees Pty Ltd., 1979). In this regard, sometimes it difficulty may be present due to the fact that the term 'evidence' has been qualified by using the term 'prima facie'. Therefore, in view of this, it can be concluded that when a profit-sharing scheme is present, it can be considered as evidence suggesting the existence of a partnership, but a person cannot be termed as a partner only due to the fact that the person shares the profit made by the business. In this regard an important case is of Cox v Hickman (1880).

In this case, the Smiths were trading as partners. However, after some time, the company fell prey to financial difficulties. As a result, B. and J. Smith entered into an agreement with their creditors. It was mentioned in this agreement that the business was going to be assigned to the creditors. The creditors will allow the carry on the business under new name. Similarly, the agreement provided that the profit made by the business was going to be divided among all the creditors. According to this agreement, when the creditors have been repaid in full, they will return the business to business to the Smiths. Under these circumstances, two of the creditors were appointed as trustees, Cox and Wheatcroft. However, Cox did not act as the trustee and similarly Wheatcroft also acted in this position for a brief period. After Wheatcroft left his position as the trustee, the other trustees incur some debts, and they also drawn some bills of exchange to Hickman. In such circumstances, Hickman applied to the court as he wanted that Wheatcroft and Cox should go to the liability for these bills. However, after considering all the facts, the decision of the court was that Wheatcroft and Cox were never mentioned as partners. At the same time, Hickman did not have any knowledge regarding the presence of the deed. Therefore, the court stated that Wheatcroft and Cox cannot be held liable for these debts even if they were sharing the profit. The court relied on the fact that only due to the reason that they were receiving a share from the profit of the business, it cannot be concluded that both of them should be treated as partners. The fact was noted by the court that the arrangement according to which the profit of the business was to be used for repaying the old debts and the creditors agreed to give up their right of the page from the capital of the business, it cannot be said that there was a partnership for the third parties who were not aware of the deed.

Case law - Smith v Anderson, 1880


The Partnership Act also provides that only on the basis of the fact the receiving debt at the liquidited demand from the profit earned by the business. It cannot be claimed that the person has to be treated as a partner. This rule is based on the judgment of the court delivered in Cox v Hickman (1860). On the other hand, when certain circumstances are present, due to which, it becomes clear that in reality the relationship was a partnership, the law provides that the lender can be treated as a partner irrespective of the intention that has been mentioned by the parties.

Conclusion:

Under these circumstances, in the present case also, by applying the legal rules that are present in the partnership Act, it is clear that Violet can be considered as a partner of Busy Bee Florist Shop. This conclusion can be drawn even if the agreement made between the parties provides that the lender (Violet) is not going to be treated as a partner in the business. However, the same conclusion cannot be made regarding Sonny. As a result, it cannot be concluded that Sonny is also a partner in Busy Bee Florist Shop. This conclusion has been made in the present case on the basis of the fact that according to the law of partnership, it has been mentioned that although the fact that a person receives a share out of the profit of the business but only on the basis of this fact, a conclusion cannot be drawn that the person needs to be treated as a partner (Badeley v Consolidated Bank, 1888). Therefore even if the person may be receiving a share, from the profit of the business or a payment that is based on the profit of the business, it cannot be concluded that such person is a partner only due to this fact alone. Hence, the law of partnership provides that the contract for remuneration that is going to be provided to servant or an agent as a share, from the profit of the business does not necessarily mean that such person is a partner and as a result, liable for the debts of the partnership.

Therefore it is clear in the present case that while Violet is a partner, Sonny is only a creditor.

References

Badeley v Consolidated Bank (1888) 38 Ch D 238

Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321

Cox v Hickman (1880) 8 HL Cas 268

Exparte Coral Investments Pty Ltd [1979] Qd R 292

Re Ruddock (1879) 5 VLR 51 (IP & M) 51

Smith v Anderson (1880) 15 Ch D 247

Stekel v Ellice [1973] 1 WLR 191

Television Broadcasters Ltd v Ashtons Nominees Pty Ltd (No 1) (1979) 22 SASR 552

Wiltshire v Kuenzli (1945) 63 WN 47

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