The partnership Act 1963 (the Act) deals with all business entities coming under the definition of partnerships in Australia. A fixed criterion is followed in order to determine that a partnership exists or not. In order to be termed as a partnership a business needs to prove that the agreement between its partners is valid according to the law of contracts. Further a partnership must be differentiated from a joint venture where an Isolated Or Single Transaction takes place as a partnership requires continuous business transactions. In the case of Smith v Anderson (1880) 15 Ch D 247 it was found by the court that a business merely indulging in periodic transactions which takes place with long gaps cannot be regarded as a partnership. In the case of Khan v Miah (2000) 1 WLR 2123, It was provided by the court that a business which meets the other essentials of partnership can be regarded as a partnership which carrying on of business is initiated. A partner is defied under Section 6 of the Act.
In partnerships there are few things which have to be in common with respect to the partners. The partners must have mutuality in relation to the rights, interest, agency and obligations of the business. The business must be carried on by the partners representing all other partners and the firm as a whole. It was ruled in the case of Degiorgio v Dunn (2004) NSWSC 767 that if a partner is not able to carry on business activities on behalf of the firm and the other partners than the business cannot be termed as a partnership. Provision relating to join ownership is provided through Section 6(1) of the Act.
The business activities must be carried out with the main purpose of making profit. A firm which does not have the intention of making profit cannot be regarded as a partnership. The work intention has to be read carefully in this case because it is not necessary for business to make profit but to have the intention of making profit in order to be called a partnership. It also have to be considered that merely ownership of property or sharing profit which may be inductive and a share in gross returns cannot be regarded as a partnership. The concept was used in the case of Canny Gabriel Castle Jackson Advertising v Volume Sales (Finance) Pty Ltd (1974). The provisions related to the sharing of profits and losses and gross returns are also provided through Section 6(3) and 6(2) of the Act.
Every party must have a say with respect to the management, profit and loss must be accompanied with presence of agency and the very intention of party is essential to determine the existence of a partnership. The concept was used in the case of United Dominions Corp v Brian (1985) HCA 49. Provisions related to the rights of the partners in management are provided through section 28 of the Act.
It has been provided by the scenario that Mary, Fred and Chris have indulged in a business through an agreement. The intention of the café is to make profits as it has been mentioned that they are to share profits equally. It has also been provided that every partner has an equal say in the management of the café. Thus it can be analyzed through the application of the above discussed principles that the form of business which has been initiated by Mary, Fred and Chris is a partnership.
The issue in this scenario is to determine the liability of the partner or partners with respect to the injury suffered by the customer.
The tort of negligence allows a party to claim compensation for any damage suffered by him due to the actions of others. In the concept of tort law (negligence) was brought up through the case of Donoghue v Stevenson 1932. The case followed various decision provided through the case where three essentials of negligence were used. In this case the person who made the claim had suffered injuries as he became ill due to finding a snail in the drink he consumed. The drink was consumed at a local café who were not the manufacturer of the drink. The plaintiff has not sued the café but the manufacturer for the injury. It was provided by the court that the manufacturer has to compensate for the damages caused to the plaintiff. This principle was known as the neighbor principle according to which a neighbor must be taken care of. Neighbor is any person who can reasonably be subjected to injuries because of one’s actions. According to the cases the tort of negligence is analyzed using the following three elements.
In the case of Stokes v House With No Steps [2016] QSC 79 it was held by the court that as the negligent act comprised of all three elements of negligence along with the damages being reasonable predictable the plaintiff was entitled to the total loss claimed by him.
Duty of care comes up when a person can harm another due to his own actions. In order to find out that a duty of care is present or not the “Caparo” has to be conducted. The Caparo test had been provided through the case of Caparo Industries pIc v Dickman [1990] 2 AC 605. The test is used when the plaintiff suffers personal injury. According to the provisions of the test the reasonability behind that the negligent act causes harm to the other or not is analyzed to establish duty of care. Duty of care may be owed to any person and a contractual relationship is not required for its existence.
After the duty of care has been found in a particular situation it is alone not sufficient to constitute the tort of negligence. It has to be proved further proved that the duty of care was not complied with by the defendant. The act of the defendant was prudent or not has to be verified. The verification is often done through the application of the objective test. The objective test was provided by the judges through the case Vaughan v Menlove (1837) 3 Bing N.C. 467. The test analyzes the reasonability behind precautions taken or ignored by the defendant. The test rules that the precautions taken by a person must be same as what a person having a reasonable mind would take if he was put to the same situation. The comparison is done of a reasonable person with that of the defendant in the existing case. If it is found that the reasonable person would have taken increased precaution as compared to what were actually taken in the case than the person is liable for breaching the duty of care.
Further the last essential of negligence which is causation has to be established along with the duty of care and breach of duty of care. Causation means the actual harm which has been caused to the person making the claim. However the loss suffered by the plaintiff after the duty of care was not complied by the defendant does not always results in the claim of negligence. In order to establish that the breach resulted in the harm caused, it has to be proved that the harm would not have been caused in case the breach did not occur. The process of analyzing this situation is provided through the “but for” test. The test was established in the land mark case of Barnett v Chelsea & Kensington Hospital [1969] 1 QB 428. In this case the plaintiff had died and the defendant doctor had breached the duty of care by not treating him. The court ruled that the doctor was not liable as the plaintiff would have died irrespective of the treatment.
As a general rule the loss suffered by a person due to the actions of another person is liable to get compensated by the wrong doer. It was provided by the court through the case British Transport Commission v Gourley [1956] AC 185 that the person suffering the injury is entitled to be compensated for the injury only. It was further provided by the case of The Wagon Mound no 1 [1961] AC 388 that a person is entitled to all losses which a reasonable person could foresee.
In the provided scenario whether a tort of negligence has been caused can be analyzed through the application of the three elements of negligence and the various tests as discussed above.
The customer had suffered injuries as she consumed a hot coffee served to her in the café owned by the defendant. It has been discussed above that the café is run under the rules of a partnership and according to the rule the partners are liable for the actions of one another. Thus in this case if it is proved that any one partner is negligent with respect to the injury caused to the customer than all three would be liable to pay damages equally.
The Caparo test is applied initially to judge the existence of duty to care. A reasonable person serving at a café would have known that if hot coffee is served to the customers it might result in injury. Thus this reason would be adequate to prove that a duty of care existed between the café and customer.
Secondly the objective test will be applied to find out that the duty was breached or not. If a reasonable person would have been present in similar circumstances than such person would have ensured that he checks the temperature of the coffee before serving it to the customers and comparing the reasonable person to Chris it can be held that reasonability was not observed by him as he did not check the temperature of the coffee.
Thirdly, the “but for” test has to be applied to verify that the harm caused to the plaintiff has resulted out of the breach as discussed above or not. The plaintiff was totally fine when she came to the café. She consumed the coffee which was really hot. If the coffee was not hot she would not have been injured. Thus the café is liable to pay the plaintiff compensation. The compensation has to be paid with respect to the total loss suffered by the customer with respect to not only the compensation for injury but also for the cost of treatment and the loss she had because of not being able to work.
A public limited company has an identity separate from its owners. Thus the company does not come to an end in case their owner dies, it enjoys perpetual existence. As the company is a separate legal entity it has the power to claim against a person or be subjected to a claim by another in its own name. The company can also hold properties in its name like a normal person. The land mark case in relation to the law governing companies is the case of Salomon v Salomon [1897] AC 22. In this case it had been provided by the court that the liability of the company cannot be imposed on the owners unless the fundamental purpose for which the company was formed was fraud.
In the case of Lee v Lee’s Air Farming Ltd (1961) AC 12 it was ruled by the court that the directors of the company will still is regarded to be under the contract of employment even if all the shares of the company are solely owned by them. Any injury which the directors may be subjected to during the course of employment is entitled to be compensated by the company (Gerner, Paech and Schuster 2013).
In the case of Macaura v Northern Assurance Co Ltd (1925) AC 619 for a change the owners of the company themselves requested that the corporate veil of the company should be lifted. The request was made so that the director could claim the insurance amount with respect to the property owned by the company after its winding up. It was provided by the court that as the property was owned by the company the director is not entitled to claim any insurance on it as they are separate entities.
However a company and its owners can be taken to be as one in cases where the intention behind the formation of the company was to do fraud as provided by the case of Green v Bestobel Industries Pty Ltd [1962] WAR 1 and Gilford’s Motors v Horne (1933) Ch 935.
The liability of the members in a public company is limited only to the amount of shares which the shareholders hold in the company. The liability may also extend to any unpaid amount on the shares held by the owners. The owners cannot be held liable for the debts of the company personally unless the corporate veil of the company is lifted. A public company may or may not publish its shares on the stock exchange. The company is in most of the cases limited by shares only. A public limited company can raise capital through by inviting the public to invest in it (Knepper et al. 2016).
Thus in the present scenario where the cafe running in form of a partnership firm is making its owners liable for the debts of the company the best form of business would be a company limited by shares. Each partner can have its own shares in the company and would only be accountable for the shares held by them. Further as the partners want to raise capital to expand the cafe they can turn the partnership into a public company which allows public to invest in the company through shares.
The Corporation Act 2001 under the authority of the Australian Securities and Investment Commission governs the law of companies in Australia. The provision related to replaceable rules and constitution of the companies is provided through Section 135. According to Section 140 of the Act any replaceable rules or the Company’s constitution work like a binding contract between members and the company, directors and the company, members and other members of the company. Under the contract each person is liable to comply with the rules as far as they are applicable on them. The replaceable rules are applicable on all companies which have been registered after 1st July 1998.
According to section 140 if replaceable rules are not included by the constitution they are not applicable. Replaceable rules are subjected to be modified or removed by the constitution.
The corporation Act provides powers to the directors of the company to carry only with all functions of the company within their scopes. According to Section 198A the directors has the responsibility to manage the affairs of the company under their directions. The directors have the power to exercise all their functions towards the company except then powers to be exercised in a general meeting provided by the constitution of this Act. The powers which have been provided to the directors include powers to issue shares and debentures and borrow money.
Section 140(3) provides that in case the directors fail to abide by the replaceable rule than they are not regarded to have breached any provision of this act and are not liable to any criminal or civil liabilities under this Act. It has further been provided by the Act that replaceable rules take effect like a contract.
In the present scenario Chris who has already caused losses to his partners due to the negligent act done by him wants to make up to his partners for his actions. Chris has already become a director of the company under to provisions of Section 9 of the Act is willing to purchase a neighborhood shop. He belies that the price at which the shop is available would be very beneficial for the business. In such belief and in good faith Crish took out loan from the company without informing the other directors. He wanted to surprise the other directors with the good news. The loan which was taken by Chris accounted to $150000 whereas the replaceable rules of the company only allowed a withdrawal of up to $100000 and anything above that required signature of another person who has been authorized by the board. Thus the replaceable rules had been violated by Chris.
The replaceable rules have an effect of a contract as discussed above. Thus according to the rules of a contract if the right of a party is violated he or she is entitled to claim compensation or rescind the contact. The contract can be rescinded when the condition of the contract is breached and compensation or damages can be claimed in case of breach of warranties of a contract. In this case Chris may be liable for the breach of warranty and may have to provide compensation to the company.
However it has been clearly provided through section 135 that the breach of replaceable rules does not account to the breach of any provisions under the Act. The act does not impose any penalties for the breach of replaceable rules by the directors. Moreover as discussed above section 198A provides the directors power to issues share, debentures and take loans. Thus the act done by breach is totally legal under the provisions of the Act. Therefore it can be concluded for the above analysis that the business bound by the loan contract under the Corporations Act 2001
The actions of the directors controlling companies in Australia are governed by both the provisions of the corporation act as well as through common law provisions.
The duties of directors are provided through Section 180-184 of the Act. These duties have been imposed on the directors so that they carry out their functions towards the company in a proper way. As the directors are in complete control over the affairs of the company they have the scope of misusing their powers thus it becomes necessary to put limitations on their power to ensure apprehension of justice.
According to Section 180 of the Act the directors of a company registered in Australia have to observe diligence and care towards the duties which are to be discharged by them towards the company. The obligation provided in Section 180 is limited to a civil obligation only. The Act further through Section 181 of the company provides that the duties of the directors must be discharged in good faith. This means the duties should be towards a just and proper purpose. The breach of this section also results in civil penalties. According to Section 182 of the Act the directors are not allowed to use the position occupied by them in relation to the company for personal interest or for a purpose which bring detriment to the company.
It has been further provided by Section 183 of the Act that the directors of the company cannot use the information which they have gained access through company to bring detriment to the company or for personal benefit.
According to the business judgment rule the court are reluctant to interfere with the decision made by the directors of the company towards its management. The directors have better knowledge about the risks which might arise in the business than the court and thus the court should not interfere with their decisions. The courts do not hold the directors liable for any decision in relation to the company I the decision had been made in good faith. The directors can evade any liability for their decisions if they can prove that the decision taken by them is in the best interest of the company as far as their knowledge. However the courts may challenge the decision of the directors if the decision has been made in bad faith in order to gain personal interest (Hill 2013).
In the present scenario it has been provided that Chris has taken a loan from the company in order to by a property which he believes to be beneficial to the business. With respect to section 180 and 181 of the act it can be said that these sections have not been breached by Chris as he has acted in the best interest of the company and also observed skill and diligence towards his duties. Further Chris has not breach section 182-183 of the act as he has not used his position or information gained from the company to its detriment or for personal interest. The business judgment rule also allows him to escape liability as he has acted in good faith for the best interest of the company. Thus it can be said that Chris has not breached any directors’ duties under the provisions of the Corporations Act 2001.
References
Barnett v Chelsea & Kensington Hospital [1969] 1 QB 428
British Transport Commission v Gourley [1956] AC 185
Canny Gabriel Castle Jackson Advertising v Volume Sales (Finance) Pty Ltd (1974)
Caparo Industries pIc v Dickman [1990] 2 AC 605
Corporation Act 2001 (Cth)
Degiorgio v Dunn (2004) NSWSC 767
Donoghue v Stevenson 1932 AC 582
Gerner-Beuerle, C., Paech, P. and Schuster, E.P., 2013. Study on directors’ duties and liability.
Gilford’s Motors v Horne (1933) Ch 935
Green v Bestobel Industries Pty Ltd [1962] WAR 1
Hill, J.G., 2013. Evolving Directors’ Duties in the Common Law World.
Keay, A., 2014. The public enforcement of directors’ duties: a normative inquiry. Common Law World Review, 43(2), pp.89-119.
Keay, A.R., 2014. Directors’ duties.
Khan v Miah (2000) 1 WLR 2123,
Knepper, W.E., Bailey, D.A., Bowman, K.B., Eblin, R.L. and Lane, R.S., 2016. Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.
Lee v Lee’s Air Farming Ltd (1961) AC 12
Macaura v Northern Assurance Co Ltd (1925) AC 619
Partnership Act 1963
Salomon v Salomon [1897] AC 22
Smith v Anderson (1880) 15 Ch D 247
Stokes v House With No Steps [2016] QSC 79
The Wagon Mound no 1 [1961] AC 388
United Dominions Corp v Brian (1985) HCA 49
Vaughan v Menlove (1837) 3 Bing N.C. 467
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