Published on 10/10/2008

Please note that these particular notes were created in 2008.

Partnership

DEFINITION

A Partnership is the relationship which exists between persons carrying on a business in common with a view to profit. It involves an agreement between two or more parties, to enter into a legally binding relationship and is essentially contractual in nature.

Partnership law derives from case law and from statute law. The relevant legislation is to be found in the Partnership Acts 1982 (NSW). This area of law is called a special type of agency and the main reason for this is that partners, when acting in the course of the partnership business, are acting as agents for one another: Lang v James Morrison & Co Ltd (1911).

DETERMINING WHEN A PARTNERSHIP EXISTS

Necessary elements
Section 1 of the Partnership Act provides that 3 elements must be satisfied in order to establish the existence of a partnership. These elements are:
•    The carrying on of a business;
•    In common;
•    With a view to profit.

If one of these elements is missing, the relationship is not one of a partnership.

1.    Carrying on of a business

A number of early decisions emphasized the need continuity and repetition.

Smith v Andersen (1880):
Brett J stated at 277-8:
“The expression ‘carrying on’ implies a repetition of acts and excludes the case of an association formed for doing one particular act which is never to be repeated. That series of acts is to a series of acts which constitute a business…The association, then, must be formed in order to carry on a series of acts having the acquisition of gain for their object.”

Ballantyne v Raphael (1889)
- A syndicate of more than 20 persons had been formed to acquire a large block of land.
- The intention was to subdivide the land and sell individual allotments at a profit.
- The court which approved of Smith v Andersen, held that this was not a company, association or partnership carrying on business for gain. It was an isolated act, not repetitive.

However, the necessity of establishing an intention to continue in business has been overlooked in some cases.
Ford v Comber (1890)
- Holroyd J admitted of the possibility that an agreement to share the cost of acquiring a single block of land and the profit on resale could constitute a partnership between the parties.

Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd (1974)
- A company named Fourth Media Management Pty Ltd (“FM”) entered into contracts with singers Elton John and Cilla Black for performances in Australia. Volume Sales (Finance) (“VS”) agreed to finance the contracts.
- Later, an agreement was made between FM and VS whereby it was agreed:
•    That FM assign to VS a one half interest in the contracts with the singers;
•    That the arrangement between FM and VS was to be performed as a ‘joint venture’;
•    That VS was to finance the contracts by way of a loan and that this loan was described as a ‘loan to the joint venture’ which was repayable prior to the distribution of profits;
•    That the accounts show that the money advanced was a loan;
•    That all profits were to be shared equally between the parties;
•    That all policy matters were ‘to be agreed upon by the parties hereto’;
•    That a bank account of VS be opened and be operated ‘in such manner as VS sees fit’;
•    That the money loaned would be repaid if the contracts with the singers failed.

- After this agreement was made, FM granted an equitable charge over its undertaking and property including its interest in the box office proceeds of the contracts to Canny Gabriel Castle Jackson Advertising Pty Ltd, the appellant.
- The question was whether VS’ interest would prevail over the later equitable charge.
- If the arrangement between FM and VS was a partnership, then VS would have a beneficial interest which would prevail over the charge.
- HC HELD: there was a partnership, even though it did not describe the parties as partners and did not provide expressly for the sharing of losses, although HC though that it did so impliedly.
- Factors which led the court to the conclusion that a partnership existed were stated as follows:
1)    the parties became joint venturers in a commercial enterprise with a view to profit;
2)    profits were to be shared;
3)    the policy of the joint venture was a matter for joint agreement and it was provided that differences relating to the affairs of the joint venture should be settled by arbitration;
4)    an assignment of a half interest in the contracts for the appearances of Cilla Black and Elton John was attempted, although, we would have thought, unsuccessfully;
5)    the parties were concerned with the financial stability of one another in a way which is common with the partners.

- The Finding by the HC that the arrangement between the parties was a partnership implicitly acknowledged that a single commercial venture could be a ‘business’ in order to satisfy the requirements set out in the Partnership Act.

This decision was applied in Television Broadcasters Ltd v Ashton’s Nominees Pty Ltd (1979), however, it was held that a joint venture for the promotion of a circus tour did not make the participants, partners. This was due to the fact that there was no agreement for the sharing of losses and, importantly, the respective obligations contained in the party’s agreement were regarded as separate obligations.
Also, the employees were regarded as employees of the defendant rather than the employees of parties jointly.

United Dominions Corporation Ltd v Brian Pty Ltd and others (1985)
- The second respondent, Security Projects Ltd (‘SPL’), was engaged in promoting two distinct but related ‘joint ventures’ involving the development of land which it was buying in Brisbane.
- One proposed joint venture involved the development of part of the land as a hotel, the other involved the developments of the residue of the land as a shopping centre.
- By September 1973, the participants in each proposed venture had been settled. Brian Pty Ltd was to have a 20% share in the hotel venture and a 5% share in the shopping centre venture.
- United Dominions Corporation Ltd (“UDC”) was also to be a participant in both ventures, however SPL was to be the main participant in each proposed venture.
- On July 23, 1974 a formal agreement in respect of the shopping centre venture was executed.
- Approx. 90% of the capital for each project was to be provided by borrowings from UDC, with the remainder being contributed by each of the proposed participants according to their respective shares.
- The prospective parties to the hotel venture, including Brian Pty Ltd, had, by Sept 1973, all made payments to SPL as project manager. The prospective participants in the shopping centre project had also made financial contributions, except for Brian Pty Ltd, which made a contribution in Nov 973.
- In Oct 1973, SPL mortgaged the land to UDC as security for borrowings for the two ventures and later 2 further mortgages were also executed by SPL in UDC’s favour.
- In August 1974, the hotel project was abandoned and thereafter the whole of the land was devoted to the shopping centre project, the shares of the various parties were rationalized.
- Eventually the shopping centre was built and sold at a large profit, however, Brian Pty Ltd received neither repayment of the money it contributed nor payment of a share of the profit.
- UDC claimed to be entitled to retain all profits because of a ‘collaterisation clause’ in a mortgage given to it by SPL before the joint venture agreement was formalized – the effect of this clause was to charge the land with all indebtedness incurred by SPL in the venture.
- When SPL went into liquidation, the question was whether UDC stood in fiduciary relationship to Brian Pty Ltd on the date on which SPL gave to UDC the mortgage containing the collaterisation clause.
- The HC HELD that UDC stood in fiduciary relationship to Brian Pty Ltd and had breached this duty. Importantly their honours stated that fiduciary obligations were not confined to persons who actually are partners, ‘but extend to persons negotiating for a partnership, but between whom no partnership, but between whom no partnership as yet exists’. This meant that UDC could not rely on the collaterisation clause.
- The agreement of 23 July 1974, although describing the parties as engaging in a ‘joint venture’ was in essence a partnership agreement dealing with a ‘partnership for one transaction’.

“There may be a partnership for a single adventure or undertaking, for the Acts provide that, subject to any agreement between the partners, a partnership, if entered into for a single venture or undertaking, is dissolved by the termination of that adventure or undertaking.” E.g. Partnership Act 1892 (NSW), s32(b).

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2. Carrying on of a business in common

To constitute a partnership the business must be carried out by, or on behalf of, all the partners (Re Ruddock (1879)), however, all the partners need not take an active role.

Lang v James Morrison & Co Ltd (1912)
- an action was bought by an English company, James Morrison & Co Ltd, against 3 defendants, J McFarland, T Lang and W Keates. The plaintiffs carried on the business of receiving and disposing of frozen meat from abroad.
- They alleged that the 3 defendants carried on business in melb as partners under the names ‘T McFarland & Co’ and on occasions ‘McFarland, Lang and Keates’.
- Before the action commenced, J McFarland and W Keates became insolvent and the action proceeded against their assignees and Lang.
- On appeal to the HC HELD: there was no partnership as there was no real evidence that the plaintiffs and Thomas McFarland intended on entering into a joint venture. They were not partners against third parties, but each party had certain rights against each other.
- Evidence for this finding was found in the fact that separate bank accounts were kept as it was apparent that neither Lang nor Keates operated on the account of T McFarland & Co. Further Lang and Keates took no part in the business of the new firm other than to sign two letters.
- It was stated:

“Now in order to establish that there was a partnership, it is necessary to prove that JW McFarland carried on the business of Thomas McFarland & Co. on behalf of himself, Lang and Keates, in this sense, that he was their agent in what he did under the contract with the plaintiffs.”

- In the circumstances, there was no such agency.
Re Ruddock (1879)
- The court HELD: agreeing with the other creditors that, although Mrs Bear took no part in the day-to-day management of the business, she was a partner and could not prove against the estate of the insolvent debtor in competition with his creditors.
- Moleswoth J at 58 stated:

“The general principle of authorities is, that a right to participate in profits constitutes a partner: and that, notwithstanding stipulation of being dormant or not liable to losses…no rights to the grandson formed part of the contract. He got nothing which was not subject to Mrs Bear’s discretion. She retained all the rights of a dormant partner.
…The cases show that the relation of partners is the result of their respective substantial rights, not of the words employed, and the result of the partnership liability from participation of profits cannot be evaded by the form of conveyance. In subsequent matter Mrs Bear and Mr Ruddock treated each other as partners, in which they corresponded that her consent was necessary.”

3. With a view to profit

The third limb of the definition confines partnerships to associations formed for making profit which is contrasted with clubs and societies formed for the promotion of religious, social, educational and recreational activities are not run in order to create profits for the individual members.

The ‘gain’ mentioned above is pecuniary gain and refers to the gain made between accounting periods. Association members cannot obtain a distribution of pecuniary gains or profits made by the association, although associations can make profits in the furtherance of their objects.

Usually courts adopt a simple balance sheet approach in relation to ascertaining whether there is a partnership ‘profit’. This test involves comparing any change in value of the assets of the company at two different points in time. Any gain in value will generally be regarded as a profit: Bond Corporation Holdings Ltd & Anor v Grace Bros Holdings Ltd & Ors.

STATUTORY RULES

Section 1 of the Partnership Act focuses upon features of the relationship between the parties in order to ascertain whether there is a partnership. If these features indicate that parties are carrying on a business in common with a view to profit then a partnership relationship will be found to exist.

As a partnership relationship is a contractual one, the actual agreement between the parties must be examined in order to infer whether a partnership relationship has been created.

Section 2 of the Partnership Act sets out some rules which are useful indicators in determining whether a particular relationship is a partnership relationship – however, these rules are not solely the determinative issues.

Both express and implied intention of the parties will be considered in order to determine whether a partnership relationship exists as in Wiltshire v Kuenzli (1945).

“it having been ascertained that the parties intended to do all the things which would constitute them partners in law, no effect can be given to their declared intention not to become partners.

It was outlined in Stekel v Ellice [1973] that the court must look at the substance of the relationship between the parties. It was HELD in that case that the fact that there was no sharing of profit did not mean that this negatived other evidence of a Partnership.

Rule 1: co-ownership

Section 2(1) of Partnership Act (PA) provides as follows:

Joint tenancy, tenancy in common, joint property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.

Therefore the holding of property jointly as co-owners will not of itself create a partnership as demonstrated in Keith Spicer Ltd v Mansell [1970].
Facts: two individuals purchased a premises upon which they hoped to establish a restaurant. They intended to form a company for this purpose.
-Prior to this formation, furniture was purchased by X for from a third party and was not paid for, so the third party then wanted to sue Y on the basis that it was in a partnership with X.
- The court said there was no partnership as X and Y were not carrying on business in common but were preparing to do so as a company.
- Acts carried out in contemplation of a business being undertaken in the future did not point to a partnership. Further, the holding of property jointly did not change things.

Rule 2: Sharing of gross returns

Section 2(2) of the Partnership Act provides:

The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.

Therefore, by itself, the sharing of gross profit will not be enough to create a partnership. This is demonstrated in Cribb v Korn (1911):
Facts: Korn was employed as a rural worker by a landowner. The landowner entered into an agreement with Cribb under which the landowner had the exclusive use and occupation of a certain area of Cribb’s land.
- As part of the agreement, Cribb would provide machinery and stock and the landowner would pay Cribb half the proceeds of sale of the produce of the land and stock, whenever this occurred.
- Korn was injured while working and claimed worker’s compensation from Cribb on the basis that Cribb and the landowner were partners.
- HELD: HC said there was no partnership, it was a mere tenancy. As the landowner had exclusive rights to occupy the land and Cribb had no right to direct or control the landowner’s working of the land, there could be no partnership but merely a tenancy. Further, the sharing of gross returns was not enough to establish a partnership, but merely constituted a rent.

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Rule 3: Profit and loss sharing

Section 3(3) of the Partnership Act provides:

The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner of the business, but the receipt of such a share, or of a payment contingent on, or varying with the profits of a business, does not of itself make him a partner in the business…;

The difficulty in the interpretation of this subsection lies in its use of the expression ‘prima face’ to qualify evidence. It would seem that the fact of a profit-sharing scheme is admissible in evidence as to the existence of a partnership, but that fact by itself is not enough to draw the inference that there was a partnership: Television Broadcasters Ltd v Ashtons Nominees Pty Ltd (1979).

In Cox v Hickman (1880), Cox and Wheatcroft were getting a share of the profit as creditors but were not found to be partners. According to Wightman J at 443:

“it is said that a person who shares in net profits is a partner; that may be so in some cases, but not in all; and it may be material to consider in what sense the words ‘sharing in the profit’ are used. In the present case, I greatly doubt whether the creditor, who merely obtains payment of a debt, and no more, out of the profits of the business, can be said to share the profits.”

The general rule is: Section 2(3)(a) of the PA provides 5 cases where the presumption that it is a partnership does not arise:

1)    Receipt by a person of a debt or other liquidated demand by instalments or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such. This rule embodies the decision in Cox v Hickman.

2)    A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such.

In Beckingham and others v Port Jackson and Manly Steamship Company and Another (1957)
Facts: a syndicate of 9 persons had been formed to purchase and renovate a submarine and then to exhibit the submarine to members of the public for a fee, this was achieved by the syndicate members entering into an arrangement in 1946 with the Port Jackson and Manly Steamship Company, whereby the submarine could be moored at the wharf.
-The syndicate members purchased the submarine and it was moored adjacent to the steamship company wharf at manly cove. While the submarine was being moored a storm broke out, and it was argued by the steamship company that the submarine became a danger to the wharf and was in danger of being stranded.
- The steamship company thereupon engaged the Waratah Tug and Salvage Co Pty Ltd (“tug company”), to take the submarine into more open waters- to protect it and the wharf. While it was being towed it was wrecked.
- Beckingham and other plaintiffs were the surviving members and personal representatives of the 9 syndicate members. They brought legal proceedings to recover damages for losses on the basis of trespass and negligence in connection with the mooring and towing of the submarine.
- An issue to be determined was, who was to be responsible for the loss sustained as a result of the destruction of the submarine? If the members of the syndicate and the steamship company were partners, then the steamship company would not be liable for loss.
- In determining whether the relationship was a partnership, the court examined the agreement between the parties.
- The agreement provided:
•    That the submarine was to be kept near the steamship company’s wharf in Manly Cove for a fee of 400 pounds per annum;
•    For the appointment of the steamship company as managers to the submarine exhibit for 3 to 5 yrs on a commission of 40% of the admission fees less some costs;
•    For a profit to be shared on a 60-40 basis in favour of the syndicate;
•    That work to be done on the submarine was to be arranged by the steamship company but paid for by the syndicate;
•    That ‘ownership and possession’ of the submarine was to remain with the syndicate;
•    That the steamship company was to undertake general management and be the sole judge of who is to be allowed access to the submarine;
•    That the steamship company was acting ‘as agent for the syndicate’;
•    For the steamship company to be exempted from liability to third parties;
•    For either party to terminate by notice after 3 yrs – in such cases the cost of removal of the submarine was to be borne by the syndicate;
•    The steamship company was to be the sole judge of who is to be allowed access to the submarine.
-Supreme Court HELD that there was no partnership between the steamship company and the syndicate. The steamship company was an independent contractor and therefore potentially liable for negligence.

3)    A person being the widow or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such.

In Federal Commissioner of Taxation v Whiting (1943), it was held that a beneficiary of a deceased partner’s estate is not taxable on income earned from the partnership unless the beneficiary has a present right to have the income paid to him by the trustees.

4)    The advance of money by way of a loan to a person engaged in or about to engage in any business or a contract with that person, that the lender shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such: Provided that the contract is in writing and signed by or on behalf of all the parties thereto.

This provision protects a creditor who has advanced money in return for a share of the profits. The creditor, of the section is satisfied, will not be regarded as a partner.

In Re Megevand; Ex parte Delhasse (1878);
Facts: Delhasse agreed to advance money to two others. Conditions of the advance referred to the equivalent of this subsection of the Partnership Act and stressed that the advance was a loan only and did not make the lender a partner.
-However, provision was made for Delhasse to share in the profits, have a right to inspect the accounts, the option of dissolving the partnership in specified circumstances. Further, the advance was not to be repayable until after dissolution and it represented all the business capital.
- HELD: Court of Appeal held it was a partnership.

5)    A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.

Where a person sells a business and then continues to receive an annuity based upon a percentage of the profits, he or she will not for that reason alone be regarded as a partner to the purchaser. The courts will look at the agreement.

In Hawksley v Outram (1892) it was contended that the agreement was for a partnership. The court held it was not, Lord Linley at 371 stated:

“It is evidently nothing more or less than an agreement for the sale of the property and the business as a going concern for a sum of money a portion of which is undetermined and has to be ascertained, and which portion until paid is to carry a share of the profits”.

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RELATIONSHIP OF PARTNERS TO OUTSIDERS

When will the acts of a partner bind their other partners?

The Partnership Act
Section 5 states:

Every partner is an agent of the firm and his other partners for the purpose of the business of the Partnership; and the acts of every partner who does any act for carrying on by the firm of which he is a member, binds the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.

Partnership is a branch of agency law, one significant difference with partnership law is that partners are both principle and agent and therefore there are two way fiduciary duties. Partners owe each other fiduciary duties.

The basis of fiduciary relationships between partners was explained by James LJ in Re Agriculturist Insurance Co (Baird’s case) (1870).

“As between the partners and the outside world, (whatever may be their private arrangements between themselves), each partner is the unlimited agent of every other in every matter connected with the partnership business, and not being in its nature beyond the scope of the partnership.”

Partners may be bound to a party who is not a partner in the following situations:
•    When the partners have authorised a person, whether or not a partner, to enter into a transaction on their behalf with the outsider. In such cases the normal rules of agency apply so that if the agent has acted in entering into a transaction within his or her actual or apparent authority, the partners will be bound to the transaction;
•    When the partners have authorised one of their partners to act on behalf of the partnership with an outsider. In these circumstances all the partners will be bound by the authorised act of their fellow partner/agent. It does not matter whether the transaction was within the scope of the partnership business or whether the outsider was aware that the agent was a partner in the business. The key to the partners being bound in this situation is the fact that the transaction was authorised by all the partners.
•    When one of the partners has acted, without express authorization, in circumstances where four requirements which are set out in section 5 of the PA have been satisfied. In this situation the fact of being a partner confers authority to bind the partnership. This will be so long as the following requirements are met:

1)    The act or transaction was entered into by a partner

It must be a transaction made by one or more of the partners. If it is not, then normal agency rules apply.

2)    The act or transaction entered into must be within the scope of the kind of business carried on by the firm

This is a question of fact. Businesses may change what they do over time.

Polkinghorne v Holland (1934)
- Mrs Holkinghorne was a client of a solicitor’s firm and received advise from one of the partners about an investment in which the partner was financially interested. This investment was a failure and Mrs Polkinghorne incurred heavy losses and brought an action claiming damages.
- The main issue was whether the two innocent partners were liable for her loss.
- The HC stated at 156-157:

“ If, in assuming to do what is within the course of that business, he is guilty of a wrongful act or default, his partners are responsible, not withstanding that it is done fraudulently and for his own benefit: Lloyd v Grace Smith & Co. But, to make his co-partners answerable, it is not enough that a partner utilizes information obtained in the course of his duties, or relies upon the personal confidence won or influence obtained in doing the firm’s business. Something actually done in the course of his duties must be the occasion of the wrongful act.”

-HELD: The giving of financial or investment advise was within the usual course of business of that firm of solicitors.

Firms may be liable to a transaction entered into by a partner notwithstanding that the firm does not enter into transactions of that type, this is usually where the transaction is of a kind that is usually entered by other firms in the same industry.

3)    The act or transaction must be effected in the usual way

Even if a partner has entered into a transaction which is within the scope of the kind of business carried on by the partnership, the transaction will not be binding if it is carried out in an unusual way.

Further the act must be reasonably necessary and not merely convenient for the carrying out of that type of business.

In ascertaining whether the partner’s action was ‘carried out in the usual way’, courts will look at the particular business and at other people’s actions in similar businesses.

Mercantile Credit Co Ltd v Garrod [1962]
Two ppl in a partnership that leased out garages, and both were prohibited from selling motor vehicles. Despite the prohibition, one partner sold a car which he did not own, and had also done so in the past.
- The plaintiff sued the partnership and recovered damages. The court looked at the transaction as it would have appeared to the plaintiff and concluded that from the plaintiff’s point of view the sale was within the usual course of business.
- Mocotta J stated that when Parkin entered into the sale of the Merc to the plaintiff, ‘he was doing an act of a like kind to the business carried on by the persons trading as a garage’.

In Goldberg v Jenkins (1889) – a partner purported to borrow money on behalf of the firm at over 60% interest when at the time the comparable rates were between 6% and 10%. It was held that such borrowing was beyond ‘the usual way’ of the firm and thus the firm was not bound to the transaction.

4)    The other Party to the transaction must either know or believe that the person acting is a partner or must not know of his or her lack of authority to act

Where a partner enters a transaction with an outsider without the authority of his or her co-partners, and that transaction is within the scope of the kind of business carried on by the firm and it is entered in the usual way, it may nevertheless not be binding on the partners if the outsider knows of the lack of authority or does not know or believe that the partner with whom they acted was a partner.

If the importance of state of mind of the outsider in relation to the capacity of a person with whom they dealt is attached, that is whether or not the outsider believed or knew the person was a partner, it is quite possible that in a partnership situation the partners who were not involved in the transaction could escape liability simply by showing that the outsider did not know or believe that the person with whom they dealt was a partner.

This was examined in Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985):
Facts: A company, Tembel, entered into a partnership agreement with Hexyl for the construction and operation of home units on land at Edgecliff owned by Tembel.
- The effect of this partnership agreement was that Tembel would enter into a contract for the construction of this building in its own name as principal. Some months later, Tembel entered into a building contract with Construction Engineering, who at the time of the agreement did not know of the existence of the Partnership, nor did it believe that Tembel was a partner with Hexyl.
- A dispute arose as to Construction Engineering’s entitlement to payment and it was argued that the contract made by Tembel had been made on behalf of a partnership between Tembel and Hexyl as principals.
- HC HELD: unanimously that Hexyl was not a party to the building contract.
- The court found that the section has two limbs:

1.    Actual authority – it provides that not every partner is deemed to be an agent of the firm and his other partners for the purposes of the partnership business but that every partner is an agent of the firm and his other partners for that purpose. The actual authority to which it refers is, however but prima facie in that it may be negated or qualified by contrary agreement of the partners - the court could not rely on this limb.
2.     Ostensible authority – Even though actual authority may be lacking, the act of every partner who does any act for carrying on in the usual way of business of the kind carried on by the firm of which he is a member binds the firm and his partners unless the other party ‘either knows that he has no authority or does not know or believe him to be a partner’. - As Construction Engineering did not know or believe Tembel to be a partner this limb of the section could not assist them.
-Finally the court noted that irrespective if Tembel as actual or ostensible authority to enter into the building contract on behalf of Hexyl as an undisclosed principal, the fact remained that it did not contract in that capacity in any case.

Ratification is where a person has purported to act as an agent but who actually had no authority to so act, has had their actions adopted or approved by the person who was originally said to be the principal. This is demonstrated in Wilson v Tumman (1843).

Ratification can be express or implied and where applicable the principal will be liable for the actions which have been ratified. In a partnership context, this means that where a person’s actions have been ratified by co-partners, the co-partners will be liable for those actions.

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The partnership Act contains other sections which regulate a partner’s dealings with outsiders. These sections include:

Partners bound by acts done on behalf of the firm

Section 6 of the PA provides:
An act or instrument relating to the business of a firm, and done or executed in the first- name, or in any other matter, showing an intention to bind the firm by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners: provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments.

This section effectively means that acts done with the intention of binding the firm will bind the firm. However, partners will not be bound where any act was done or document signed, even if related to the business and done for its benefit, if it is done by a person in his or her own right and not on behalf of the firm. - The question will always be: did the person act privately or on behalf of the firm? The provision is complemented by the following two sections:

Partners using the credit of the firm for private purposes

Section 7 of the PA provides:

Where one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound unless he is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner.

This means that partners using credit of the firm for private purposes will not bind the partnership unless they are specifically authorised by the other partners. The limits of being ‘specifically authorised’ are unclear, however there is some authority to suggest that if an outsider had reasonable grounds to suppose that there was authority (Kendal v Wood (1870)) or a representation or some form of acquiescence (London Chartered Accountant v Kerr (1878)) existed, this would be enough to satisfy the section.

Notice of an agreement that a firm will not be bound by the act of a partner

Section 8 of the PA provides:

If it has been agreed between the partners that any restrictions shall be placed upon the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.

Therefore partners who have restrictions placed upon their powers to bind the firm will not bind it when they exceed these restrictions if the other party to the transaction knows of the restrictions. This applies where the partner’s power has been restricted or terminated. In such cases notice of the restriction or termination must be given to the outsider.

LIABILITY IN CONTRACT, TORT AND CRIME

Debts and obligations
Section 9 of the PA provides:

Every partner in the firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of his separate debts.

Joint liability means that, although liability is incurred by two or more persons, there is only one right of action against them. So, once judgement is entered against a partner or partners, further legal action cannot be brought against the other partners who could have been jointly liable had they been included in the action.

Liability of the firm for wrongs
Section 10 of the PA provides:

Where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of the partner’s co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitted to act.

Further Section 12 of the PA sets out that the liability for wrongs is joint and several. The Act provides:

Every partner is liable jointly with the partner’s co-partners and also severally for everything for which the firm while the partner is a partner therein becomes liable under either of the last two proceeding sections.

Thus liability for both civil wrongs and crime is covered by these sections. In order for liability to be established it must be shown that the wrongful act or omission of the partner:
•    Occurred in the ordinary course of business of the firm or
•    Was authorised by the co-partners.

In Walker and others v European Electronics Pty Ltd (1990-1991), Gleeson CJ stated at 10:

“…the essential task remains one of identifying the nature and scope of the business of the firm and relating the wrongful act to the business so identified…The nature and scope of the business of a firm will fall to be determined by reference to the agreement between the partners.”

National Commercial Banking Corporation of Australia Ltd v Batty (1986)
Facts: The respondent was a partner with a person named Davis in an accountancy practice in Katoomba . Davis was also a director of a company called Bushby Pty Ltd, and he deposited two cheques belonging to the company (Bushby) in the accountancy’s practice trust account.
-Davis later withdrew the proceeds from these cheques and misappropriated the whole amount.
- The appellant bank was held liable to the third party in conversion for collecting the proceeds for Davis and, on appeal, the appellant argued that s 10 of the PA made the respondent liable. Davis in the meantime had died.
- HC HELD: the deposit of the cheques in the partnership account was not a transaction in the ordinary course of the firm’s business and was not in the actual or apparent authority of Davis. This meant that the respondent was not liable for Davis’s wrongful act.
- In finding that Davis, by depositing the cheques, was not acting in the ordinary course of business of the firm, support was found in the fact that the cheques were made out to the company, not the firm, and that the cheques were substantially larger than any others which had been paid into the trust account.
- Also, unlike other cheques paid into the account, these were payable to a third party, were not deposited through the usual trust account deposit book, and were not deposited by the secretary who usually carried out the banking.
- Deane J suggested that an examination of the actual practices of the particular firm was required.
- Brennan J stated that, each partner is an agent only in and for the business of the firm. Acts beyond that business will not bind the firm.
- On the issue of whether Davis acted ‘with the authority of his co-partner’ in depositing the cheques to the credit of the trust account, the court found that Davis had no wider authority than the ordinary authority he had as a partner.
- The HC noted that s 10 of the NSW Act referred to ‘authority’ whereas s 11 of that Act, in contrast referred to ‘apparent authority’.
- Here it was held that apparent authority of Davis vis-à-vis the bank did not extend to doing anything outside the ordinary course of the business of the firm. When the account was opened up, it could not be said that Davis was authorised to deposit cheques which neither he nor Mr Batty had any right or authority to deposit.

Liability for misapplication of money or property received by the firm

Section 11 of the PA provides:

In the following cases, namely:
(a)    Where one partner acting within the scope of his apparent authority receives the money or property of a third person and misapplies it; and
(b)    When a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm;

The firm is liable to make good the loss.

Subsection (a) relates to instances where the partner is acting within his or her apparent authority and actually misapplies the money or property.

Mann v Hulme (1961)
M and R were solicitors in a partnership. Mr and Mrs H were clients of the firm and dealt with R. R prepared their wills and discussed the probability of making investments on their behalf.
- R told Mr and Mrs H that the firm had clients engaged in the building trade who wanted to borrow money on second mortgage from time to time, and he offered to invest their money in this way.
- In return, Mr and Mrs H would receive interest. R assured them that their investment would be quite safe.
- Mr and Mrs H sued M and R on the basis that the money received by R was misapplied. There is no question that at the time the money was received by R, he carried on practice as a solicitor in partnership with M. However, M neither took part nor had any knowledge in these dealings.
- On appeal to the HC, the court was asked to consider the matter in the light of the PA and the material issue was whether R was acting within the scope of his apparent authority as a partner in the firm in his dealings with the respondent and her husband.
-Their honours said at 156:
‘But even if no mention was made of ‘second mortgages’ there can be no doubt that the moneys were placed in Richardson’s hands for the purpose of making specific investments from time to time upon securities prepared by him, and such a finding would be sufficient to bring the case within sec 11.
- Therefore M was liable for the money.

Subsection (b) relates to cases whereby money or property is received by the firm in the course of its business and this money or property is misapplied by one of the partners.

Rhodes v Moules
- Rew was a solicitor in a partnership with Messrs Hughes and Masterman. Mr Rhodes was a client of the firm and the firm had acted for him on previous occasions.
- Mr Rhodes wanted to borrow some money on a property and asked Rew as his solicitor to assist him to affect the mortgage.
- Some clients of the firm, the Moules, were willing to lend the money. As security for the mortgage, Mr Rhodes gave Rew some share certificates and these were misappropriated by Rew.
- One of the questions facing the court was whether the other two partners were liable for Rew’s actions. The court held that the partners were jointly and severally liable for the value of the shares under part (a) and part (b).
- The judge said that ‘the inference that the plaintiff’s certificates were received by the firm in the course of its business’ was justified.

Incoming and outgoing partners

Section 17 of the PA provides:
1.    A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.
2.    A partner who retires from a firm does not thereby cease to be liable for partnership debt and obligation incurred before his retirement.
3.    A retiring partner may be discharged from any existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement may be either expressed or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.

Basically, a partner will only be liable for debts and obligations incurred while he or she is a partner. Retiring partners will be liable for debts and obligations incurred while they were partners, subject to being discharged by the new partners and creditors. However, consent of the incoming partners or creditors to the debts will often be drawn as an inference from the parties conduct.

When a partner retires, they should advertise in the local newspaper, so at to give notice to outsiders, otherwise they may still be an apparent partner.

Liability by non-partners – by ‘holding out’ or estoppel

Section 14 of the PA provides:
1.    Everyone who by words spoken or written, or by conduct represents himself, or who knowingly suffers himself to be represented as a partner in a particular firm, is liable as a partner to any one who has on the faith of any such representation given credit to the firm. Whether the representation has or has not been made or communicated to the person so given credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.

2.    Provided that where after a partner’s death the partnership business is continued in the old-firm name, the continued use of that name or of the deceased partner’s name as part thereof shall not of itself make his executors or administrators’ estate or effects liable for any partnership debts contracted after his death.

This section makes it clear that it is the person who is represented as a partner or who represents himself or herself as a partner that is liable to outsiders who have on the faith of the representation given credit to the firm. Such a person my be described as a ‘partner in estoppel’.

In Re Buchanan & Co (1876), it was held that the section places liability upon the person who represents themselves, or allows themselves to be represented as a partner – not upon the actual partners.

To incur liability under this section, 3 tests need to be fulfilled:
•    A representation must be made that the person is a partner. This can be done by the person themselves or any of the partners generally. It will be a question of fact whether a representation has been made. Further the representation need not have been made directly to the person who acts upon it. As in Martyn v Gray, if this representation has been made, then the defendant will be found liable.
•    Credit must be provided by a third party who believes the representation to be true.
•    Credit must be provided by a third party who believes the representation to be true. Credit would include the receiving of property or the incurring of an obligation.
•    The third party must rely upon the representation.

Admissions and representations by partners

Section 15 of the PA provides:

An admission or representation made by a partner concerning the partnership affairs , and in the ordinary course of business, is evidence against the firm.

The firm will be responsible in circumstances contemplated by the section for statements of a partner when they are made by the partner who is acting within their actual or apparent authority.