1. Explain how a partner can be sued from the operations of the partnership. Be sure to consider liability within the partnership as well as liability to outsiders.
2. Will is the only director of Pizza Plus Pty Ltd (Pizza Plus) a small company which makes and sells pizzas in Australia.
Will’s wife Betty is a director of Dominos Australia Ltd (Dominos) which also makes and sells pizzas in Australia and has just introduced in Australia the first pizza delivery by drone. This drone delivery has been very successful.
Betty is also a shareholder in her husband’s company, Pizza Plus. Betty takes from Dominos secret details about the drone delivery service and the customer lists and gives them to her husband and his company, Pizza Plus. Pizza Plus uses these details and starts its drone service and sales increase greatly. A month after starting this new service one of Pizza Plus’ drones falls and hits Jill, a customer, on the head, causing serious injuries.
1. A partnership agreement is said to be an agreement, which is entered into by two or more persons, companies, or other entities agree to carry on a business together with an objective to earn profit. The statutory definition of partnership has been laid down under the Partnership Act of Australia. Section 4 of the statute defines partnership as a relation that exists between two or more persons who carries on a common business with the motive of earning profit as observed in the case of Cox v. Hickman. However, the relationship that subsists between an association and an incorporated company does not constitute a partnership agreement. The persons who enter into a partnership agreement are called partners (John Gimes Partnership Ltd v. Gubbins [2013]. The partners together are known as ‘firm’ and the name under which the partnership business is carried on is called the ‘firm name’. The rights and duties of the partners are governed by the partnership agreement that may be verbal or a written agreement (Whittaker 2016).
Section 13 of the Partnership Act 1963 states the liability of the partners in a firm. The partners are jointly liable with the remaining partners in the firm for the obligations and debts of the firm that incurs while they remain as partners as stated in Polkinghorne v. Holland [1934]. The Partnership Act 1891 holds all the partners liable for the debts incurred without their authority and consent. The partners cannot transfer their ownership to another person without their consent. The partners must disclose relevant matters to the other partners. A partner is not allowed to earn personal profits or commission. A partner is restricted from utilizing the property of the firm for personal purposes. A person, who otherwise is not a partner, shall be considered as one by estoppel if that person represents him as a partner or if a third party believes and rely upon the representation (Mitchell et al. 2016).
Any partner who commits a breach of the partnership agreement and their fiduciary duties shall be entitled to a legal proceeding brought against him by the other partners. A partner carrying on another firm on the same business line without the consent of the other partners, that partner shall pay to the firm all the profits earned by the other firm. Partnership agreements that includes a clause on liquidated damages and where the amount of the damages have been mentioned, the partner shall be liable to pay such stipulated amount of damages to the aggrieved partner.
Section 14, 14 A, 15 and 16 of the Partnership Act stipulates that where any partner acts wrongfully during the course of the business or when the co-partners authorizes such wrongful act, any loss incurred or any injury caused to any third person, the firm is equally liable with the person committing such act (Harris, Hargovan and Adams 2013). In case a partner or the partnership firm misuses the property or money of any third person, both the firm and the partners shall be held liable. The partners of a firm are either individually or separately liable to the outsiders. Two or more partners shall be jointly liable irrespective of the individual liability.
2. The Corporations Act 2001 (Cth) lays down the following duties that the directors of a company are obligated to discharge during the course of the business:
Section 180 of the Act is one of the most essential duties to be discharged by a director of a company as observed in the case of Michael v. Mc Donald’s Australia [2014]. The responsibilities, position and the experience of the Directors are some of the factors that constitute the standard of diligence and care to be exercised by the directors (Barker 2016). The directors owe certain obligations to the third parties as well. Such duties, if violated, shall make the directors personally liable for the same (Chen, Li and Zou 2016). Such duties are enumerated as below:
However, The Directors can defend themselves if they succeed in establishing the fact that they have been exercising proper care and adequate diligence in the course of their business activities.
A director of a company cannot be exempted from the liabilities that arise as a result of the Director’s breach of duties. The Directors committing the breach shall not be entitled to be indemnified for the commission of such infringements in Regent Crest Plc v. Cohen and another [2001] 2 BCLC 80. However, the company may provide insurance protection to the directors from his liabilities subject to the condition that such liability has not arisen from the Director’s breach of the duty of not taking undue advantage of information and the Director’s position as observed in Vilsmeier v. Al Airports International Limited and Pl Power International Limited [2014] JRC 257.
The Directors owe their duties to the company and such duties shall not be extended to to the individual shareholders in Re Smith and Fawcett Limited [1942] 1 ALL ER 542. In case, the Director commits an infringement of their directorial duties, the company shall become liable (Hanrahan, Ramsay and Stapledon 2013). The shareholders shall not be held liable for the breach of the directorial duties. However, any member of a company may bring legal action against the director committing breach of the duties with the prior approval of the court (Huggins, Simnett and Hargovan 2015).
In the given case, Betty was a director of the Dominos Australia Ltd and her husband Will is the sole director of the Pizza Plus Pty Ltd. Betty introduced pizza delivery by drone which proved to be successful. She secretly gave the details of the drone delivery to her husband and consequently the sales of Pizza Plus Pty Ltd increased gradually. However, a customer named Jill was seriously injured because of the drone.
Here, Will the director of the Pizza Plus Pty Ltd, is liable for the commission of breach of exercising the duty of care and negligence as stated under section 180(1) of the Corporations Act (Langford, Ramsay and Welsh 2015). The directors of a company must discharge their directorial duties by exercising due care and diligence that any prudent person would exercise if he were the director of the company. Now, Will relied on the information about the drone from his wife Betty who was a director of the Dominos Australia Ltd. Will failed to exercise proper care towards its customers. Section 180(2) of the Corporations Act signifies the ‘Business Judgment Rule’. The significance of the rule is that a director is considered to have fulfilled the requisites of the duty of care and negligence while making business decisions. While making the decisions the directors must make such decision for the benefit of the company. In case the director commits a breach of his duty of care and diligence, he shall be entitled to civil penalties provided under the Corporations Act. The civil penalties include fines and the director shall be entitled to pay compensatory damages. The business judgment rule is applicable only in case of the director’s duty to exercise care and diligence (Varzaly 2015).
Betty is a shareholder of the Pizza Plus Pty Ltd and the breach committed by Will shall not make Betty entitled to penalties or pay damages. As it is a well established law that the directors owe their duties to the company and such duties shall not be extended to the individual shareholders. In case, the Director commits a violation of their directorial duties, the company shall become liable. The shareholders shall not be held liable for the breach of the directorial duties (Hedges et al. 2016).
In the mentioned case, Jill who sustained serious injuries because of the drone is entitled to bring a legal action against the company Pizza Plus Pty Ltd under the Competition and Consumer Act 2010(Cth). The directors of a company who commits a breach of the provisions laid down under the act becomes personally liable (Whish and Bailey 2015). Hence, Will being the sole Director of the company would become personally liable for failing to provide adequate consumer protection.
Reference List
Barker, R., 2016. The Duties and Liabilities of Directors—Getting the Balance Right. The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members, p.249.
Chen, Z., Li, O.Z. and Zou, H., 2016. Directors? and officers? liability insurance and the cost of equity. Journal of Accounting and Economics, 61(1), pp.100-120.
Corones, S.G., 2014. Competition law in Australia. Thomson Reuters Australia, Limited.
Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.
Harris, J., Hargovan, A. and Adams, M.A., 2013. Australian corporate law (Vol. 2). LexisNexis Butterworths.
Hedges, J., Bird, H.L., Gilligan, G., Godwin, A. and Ramsay, I., 2016. An Empirical Analysis of Public Enforcement of Directors’ Duties in Australia: Preliminary Findings.
Huggins, A., Simnett, R. and Hargovan, A., 2015. Integrated reporting and directors’ concerns about personal liability exposure: Law reform options. Company and Securities Law Journal, 33, pp.176-195.
Langford, R.T., Ramsay, I. and Welsh, M.A., 2015. The origins of company directors’ statutory duty of care.
Mitchell, R., O’Donnell, A., Marshall, S. and Ramsay, I., 2016. Law, corporate governance and partnerships at work: a study of australian regulatory style and business practice. Routledge.
Varzaly, J., 2015. The Enforcement of Directors’ Duties in Australia: An Empirical Analysis. European Business Organization Law Review, 16(2), pp.281-319.
Whish, R. and Bailey, D., 2015. Competition law. Oxford University Press, USA.
Whittaker, J., 2016. The law of limited liability partnerships. Bloomsbury Publishing.
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