Partnership (PA= partnership back)

WHETHER A BUSINESS IS A PARTNERSHIP

LP <Definition>: Partnership is the relation which subsists between persons carrying on business in common
with a view of profit (S. 5 PA)

First element: carrying on business

 Repetitive or regular acts (Ferguson v Federal Commissioner of Taxation)
 Business is defined to include any trade, occupation or profession (S. 3 PA)
 Preparing to carry on a business not sufficient (Gouldberg v Herniman Associates Pty Ltd)

Second element: in common

 Sections 6 PA assists in distinguishing whether a business is ‘in common’ and therefore a partnership:
o Co-ownership of property – not of itself a partnership (S. 6 (1) PA)
o Sharing gross returns – not of itself a partnership (S. 6 (2) PA)
o Receiving share of profits – prima facie evidence of partnership (S. 6 (3) PA) unless:
 Creditors taking proportion of income (instalments) from profits to repay debts – not of itself a
partnership (S. 6 (3) (a) PA)
 Remuneration contract paid from profits – not of itself a partnership (S. 6 (3) (b) PA)
 Annuity payments to widows and deceased partner’s children – not of itself a partnership (S. 6 (3) (c)
PA)
 Creditor who finances a project to share in returns – not of itself a partnership (S. 6 (3) (d) PA)
 Securing payment for sale of goodwill of business - not of itself a partnership (S. 6 (3) (e) PA)
 Section 6 PA is non-exhaustive: courts will look at other rights in determining whether a partnership
exists
o All partners have a right to participate in MGT of a business (need not be equal right) (Gouldberg v
Herniman Associates)
o Must be a mutuality of rights and obligations e.g. sharing of profits and losses

Third element: view of profit

 Partnership must aim to make profit (S. 5 PA)
 Important consideration is that making profit was original purpose

LIABILITY OF PARTNERS TO THIRD PARTIES – DEBTS & OBLIGATIONS

LP <Definition>: Every partner is jointly liable for debts and obligations incurred if such debts and obligations
are:

 Within the scope of the kind of business carried on by the partnership and
 Acquired within the usual way that partnerships of that kind conduct business (S. 9, 13 PA)

LP <Exception>: partner that incurred debt or obligation had no authority to act (actual or ostensible) and third
party knew this or third party didn’t know or believe partner was in fact a parent (S. 9 PA)

LP: Even if a partner acts beyond actual or ostensible authority, the partnership may still become liable if the
other partners ratify the act (Re Oppenheimer). Ratification can only be inferred from subsequent conduct if
partners have knowledge of the unauthorized transaction (Lederberger v Mediterranean Olives)

Example: borrowing at 60% interest – not within usual way (Goldberg v Jenkins)

Example: legal advice about an investment in which the partner was financially interested – not within scope of
kind of business (Polkinghorne v Holaand)
LIABILITY OF PARTNERS TO THIRD PARTIES – WRONGFUL ACTS

LP: Partners are jointly and severally liable for wrongful acts or omissions if:

 Committed in the ordinary course of the business of the partnership; or

 With the authority of co-partners (S. 14, 16 PA)

Example: legal advice about an investment in which the partner was financially interested – within usual course
of business (Polkinghorne v Holaand)

LIABILITY OF NON-PARTNERS TO THIRD PARTIES

LP: Whether a non-partner holds themselves out as a partner or allows themselves to be held out as a partner to
anyone who reasonably believes him or her to be a partner – that non-partner is liable for debts incurred (S. 18
PA)

LP: holding out can be verbal, written or by conduct (S. 18 PA)

LP: third party must rely on holding out (S. 18 PA)

Example: holding out on letterhead (Lynch v Stiff)

QUESTION 4

Issue: whether A, B and C are in a partnership

Rule: Partnership is the relation which subsists between persons carrying on business in common with a view of
profit (S. 5 PA). S. 6 PA assists in making this determination. S. 6 PA is non-exhaustive – courts will look at
other rights in determining whether a partnership exists.

Application:

 The business is a book shop which is a trade that involves repetition of activity (Ferguson v Federal
Commissioner of Taxation) (S. 3 PA). This meets the requirement of carrying on a business.
 Coco receiving $5k a year from sales less outgoings is not of itself a partnership (S. 6 (3)(a) PA). Also
just because Coco finances the expansion by lending $50k, this alone is not a partnership indicator (S. 6
(3)(d) PA). By themselves, these indicators do not satisfy the in common element.
 So we look at other rights. On the facts, Coco is consulted on major decisions and has the right to
inspect books. These rights, in addition to the indicators in S. 6 PA demonstrate that the business is
being carried on in common.
 There is nothing to suggest that the intention is not to make a profit. So we can assume this aspect of
the definition is also satisfied.

Conclusion: It is likely that the relationship between A, B and C is a partnership.

Q5a

Issue: Is the partnership bound to pay $10k for the second-hand car (liability for debt)

Rule: LP: Every partner is jointly liable for debts and obligations incurred if such debts and obligations are:

 Within the scope of the kind of business carried on by the partnership and
 Acquired within the usual way that partnerships of that kind conduct business (S. 9, 13 PA)

LP <Exception>: partner that incurred debt or obligation had no authority to act (actual or ostensible) and third
party knew this or third party didn’t know or believe partner was in fact a parent (S. 9 PA)

Application: The purchase of the second hand cars is within the scope of the business as the nature of the
business is a second-hand car dealership. There is nothing to suggest that the purchase was not made in the usual
way. There is also nothing to suggest that Brian did not have authority to make such purchase as there is no
agreement between Brian and Adrian.

Conclusion: Partnership is bound.

Q5b

Issue: Is the partnership bound to pay $1k for the leather jacket (liability for debt)

Rule: LP: Every partner is jointly liable for debts and obligations incurred if such debts and obligations are:

 Within the scope of the kind of business carried on by the partnership and
 Acquired within the usual way that partnerships of that kind conduct business (S. 9, 13 PA)

LP <Exception>: partner that incurred debt or obligation had no authority to act (actual or ostensible) and third
party knew this or third party didn’t know or believe partner was in fact a parent (S. 9 PA)

Application: The purchase of the leather jacket is not within the scope of the business as the nature of the
business is a second-hand car dealership. There is no clear correlation between the purchase of the jacket and a
car business.

Conclusion: Partnership is bound.