Business And Corporations Law For Entire Partnership

Issue

Describe about the Business and Corporations Law for Entire Partnership.

In the present assignment, the legal issue in question has to do with whether the actions of a partner can bind the other partners in a partnership firm and make them liable as well. Specifically, what we have to see is whether the action of Adrian in entering two separate agreements, one for buying of Accounting Journals from Tom for $15000 and the other for buying of surveying material from Edgar for an amount of $8000, without the knowledge of the other two partners, Adian and Peter, will bind the entire partnership firm or not.

The first and foremost thing to be looked at, in case of situations such as the present case is the term and conditions which the partners had agreed between them. The law will look at the terms arrived at by the partners in a partnership firm and will give effect to it, accordingly. These are clauses and agreements which will lay down the groundwork or the framework for ensuring what kind of liability is owed by each partner to the others as well as to the partnership firm, too (Peirson et al. 2014). This results in the situation that if a partner is doing or has done something for which he had authority, then entire firm as well as the partners too, will be bound and liable for it (Pollock, 2013, p. 10)

Apart from this, however, there are also certain other ways, how the different partners in a partnership firm may be held liable for the actions of the other partner even when the other partner overstepped his boundaries in terms of the authority that he had. This situation, in fact, has been provided for in the provision, present in the Partnership Act of 1892 (NSW) (Business and Corporation law 504 Modules, 2015, Topic 13).

The two most important sections present in the Partnership Act of 1892 (NSW) which adhere to the present issue of an action of a partner outside his scope of authority binding the other partners, is ‘s’ 5(1) and ‘s’ 8 of the same.

Section 5(1) of the act quite categorically lays down that an unauthorized action of a partner outside his scope of authority will still be able to bind the fellow partners, provided two elements are present. Firstly, for this section to apply, the unauthorized action of the partner has to have some connection with the usual or normal course of business of the partnership firm. This basically means that if a partnership firm is involved in the business of selling of clothes, then the action of the partner outside his scope of authority has to be connected with activity of such sales. If it is not connected with the usual course of business, then the other partners cannot and will not be held liable. Secondly, the other requirement which has been envisioned in the ‘s’ 5(1) is that the third person the partner acting outside his scope is dealing with has no prior idea of the partner overstepping his boundaries. If it can be proved by the other partners that the third person had knowledge about the partner not acting in tune with his authorization, then the other partners will be able to deflect the blame and their liability as well (Partnership Act of 1892 (NSW).

Relevant Laws and Rules

Section 8 of the same act has also been structured, keeping in view the same kind of issue as well. Section 8 states in no uncertain terms that the arrangement between the partners with regards to their scope of authority to bind each other is a sacred covenant for the partnership business to exist and as such if any outside person privy to such agreements still decides to go ahead with an arrangement with one of the partners, where such arrangement is outside the scope of authority of the partner in question, then the third party will not be allowed to take advantage of his wrong and bring a claim against other partners (Partnership Act of 1892 (NSW).

Apart from these, ‘s’ 6(1) and ‘s’ 7(1) has helps in establishing the same principle with regards to action of a partners, binding the other partners and making them liable as well.

There are a couple of decisions of the court as well apart from these statutory provisions, which helps us in understanding the liability existing between the partners. First, among these is the landmark case of Mercantile Credit Ltd. Vs. Garrod (Mercantile Credit Ltd. Vs. Garrod [1962] 3 All ER 1103). In this present case, there were two persons involved in the business of garage services. In the internal arrangement between the two partners, they had agreed to not partake in the business of trading of cars. However, one of the partners without the knowledge of the other decided to sell a car over which he had no right to a third party in the name of the partnership business. The third party, quite clearly had to return the car back to its original owner after some time and hence decide to claim charges against the partnership, consequently. The partner without whose knowledge such a transaction was made, tried to avoid liability by showing the internal arrangement of the partnership firm. The court, however, in its judgment quite clearly laid down that selling and buying of cars can said to be in the normal course of garage business and since the third party did not have any idea about the internal agreement between the partners, both the partners in such a case should be held liable.

The other case, similar to the present situation was the case between Australasia v Breillat (13 ER 642), where the privy council quite clearly laid down that there exists a relationship of agency between the different partners in a partnership firm, especially when one partner does something similar to the business the partnership firm is involved in.

Application of Relevant Laws and Rules

With the relevant laws and cases discussed above, we will now be able to see whether Tom and Edgar will be able to claim from only Adrian or even from the other partners as well.

The internal arrangement between the partners of the firm was that they would be able to bind each other to the tune of $ 10000. In the case of buying of surveying materials from Edgar, even though it was in connection to something which could not have been said to be in the normal course of business, but the fact that the partners were liable for each other’s actions up to an amount of $10000, will mean that the other partners will be liable to pay Edgar the required sum. Moreover, simply because of the fact that not only was that particular transaction connected to the normal course of business of the firm but also because Tom had no idea about the arrangement of the partners, tom will be eligible claim in view of ‘s’ 5(1) and ‘s’ 8 along with the judgment of the court in the two above referred cases.

Conclusion:

In the present case, the partners will be liable to both Tom as well as Edgar, due to the partnership provisions prevalent in the country (Gaal, 2013, p.267). Both Tom as well as Edgar will be able to bring action against all the three partners, Adrian, Adian and Peter as well and will be able to prove their case in the court of law.

Based on the facts, the issue that arises here are the following:

Whether Richard can be held liable for breaching the “non – compete clause” with Nu Slim Pty Ltd and whether the company will be asked to close down after its incorporation?

Whether Richard and Frances will be held liable for not paying the installment of  the loan that costs 40000 dollars owed to United Bank by Fat Away Pty Ltd?

A company structures a “non compete clause” to restrict the employees from competing against the organization after they complete their period of employment. This kind of restraint is achieved by inserting a non compete clause. This clause enables not only the former employees from competing against the firm but also restraints the existing employees from competing against the organization (Bunstoff et al. 2013). The reason why this rule was included in the Corporations Act was to ensure that the employees do not take unfair advantage of the information that is available to the employees at the time of their employment. This means that the employees, during the course of their employment, will be liable to the company for all their actions that is competitive in nature (Davis et al. 2015, p. 255). Additionally, the case has also given attention to the concept of separate legal entity under section 119 of the Corporations Act  2001 (Cth). As per section 119 of the Act, a company that is registered under the Corporations Act has the capability of suing others and being sued in its own name. This means that the company has to bear all the liabilities in its own name. The liabilities that the company shall undertake will be in its own name as well as in the name of its members. The liabilities may be related to the undertaking of a debt or some other issue that has to be proceeded in the name of the company (Hannigan, 2015). In such an instant, the company will be able to fulfill the principles of separate legal entity. The company possesses the status of a natural person and was to be protected under the doctrine of corporate veil.

Conclusion

However, the Court in certain situations may ask the company to lift its corporate veil. The Court uses its discretionary power in such situations and ensures that the company’s corporate veil is lifted, especially when the company’s working is in question (Grantham, 2013, p. 311). The reason why the corporate veil is lifted from any company is to find out the true owners, members and shareholders of the company. Section 588 V – X of the Corporation Act deals with the doctrine of lifting the corporate veil.

Likewise, in the instant case as well, the issue that is related to the non-competing clause, Richard can claim that the company that was established by him was a separate legal entity and thus, cannot be held liable. However, the Court may hold Richard liable for breaching the clause that relates to restraint of trade. The judgment that was taken by the Court in the case of Gilford Motor Co. Ltd Vs. Horne ([1933] Ch 935), can be applied in the given case study as well as making Fat Away Pty Ltd liable for their actions.

The second issue that was in question was related to the lifting of corporate veil. In this case, the Court may order the company to lift their corporate veil to examine and investigate how the owners of the company managed and control the working of the firm. Thus, the company’s corporate veil may be lifted.

Conclusion:

Conclusively, it may be held that Richard will be found guilty of breaching the non compete clause and at the same time, it will also be answerable to Nu Slim Pty Ltd. Moreover, Richard and Frances will also be held liable for not paying the installment of their loan of 40000 dollars owed by United Bank. As such in the present situation both Nu slim Pty Ltd. as well as the United Bank will be able to prove their charges against Richard.

References:

Australasia v Breillat (13 ER 642).

Bünstorf, G, Engel, C, Fischer, S and Guth, W (2013). Win Shift Lose Stay–An Experimental Test of Non-Compete Clauses. MPI Collective Goods Preprint, (2013/17).

Business and Corporation LAW504 Modules.

Corporations Act 2001 (Cth).

Davis, A, Reicin, E. D and Warren, M (2015). Developing Trends in Non-Compete Agreements and Other Restrictive Covenants. ABA Journal of Labor & Employment Law, 30(2), 255.

Gaal, J (2013). Definitions of. Division 7A Handbook: The Practitioner’s Guide to the Div 7A Rules, 267

Gilford Motor Co. Ltd Vs. Horne [1933] Ch 935.

Grantham, R (2013). Corporate Veil: An Ingenious Device, The. U. Queensland LJ, 32, 311.

Hannigan, B (2015). Company law. Oxford University Press, USA.

Mercantile Credit Ltd. Vs. Garrod [1962] 3 All ER 1103.

Partnership Act 1892 (NSW).

Peirson, G, Brown, R, Easton, S and Howard, P (2014). Business finance. McGraw-Hill Education Australia.

Pollock, M (2013). So you want to be a partner?. Brief, 40(7), 10.