Liability of Partners in a Partnership Business Structure

Company and Commercial Law

Answer-1
Issue-1
The issue, in this case, revolves around the type of business structure in which the
business is running and status of members who are involved in the business.
Rule-2
There are different business structures operating in Australia, and each structure has
different characteristics. A partnership is a relatively common business structure which
is selected by parties while operating their business in Australia. The definition of a
partnership is mentioned under section 5 of the Partnership Act 1958. When two or
more parties enter into an agreement to run a business in common in order to
generate profits, it is referred as a partnership. The members of a partnership are
called partners, and they are mutually obligated towards the business. In order to form
a partnership, parties must run the operations of a business together. In Ferguson v
Federal Commissioner of Taxation case, the court differentiates between carrying out
of a business and carrying out a hobby. In this case, the court provided that Ferguson
can claim the loss suffered by him as a tax deduction because the operations were of
commercial nature and proper books of accounts were made by him as well. In
Goudberg v Herniman Associates Pty Ltd case, the court provided that parties were
acting in common however they were not involved in carrying out the business based
on which a partner cannot be held liable by the court.
While running the business, partners are required to operate the business in common
along with other partners. In Re Ruddock case, a debt was owed by Ruddock to Mrs
Bear, and in order to pay off such debts, Mrs Bear acquired shares in the business
which made her liable to get 25 percent of the profits. Ruddock also required
consulting with Mrs Bear before introducing a new partner in the business. The court
held that a partnership had been established between the parties based on which both
of them can be held liable for the action of each other. The objective of formation of a
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partnership must be to generate a profit in the business for the partners and partners
must share the profits of the business. In Canny Gabriel Castle Jackson Advertising Pty
Ltd v Volume Sales (Finance) Pty Ltd case, the court held that the fact that a loss has
occurred in the business does not terminate a partnership. An exception is given in
Plummer v Thomas case, in which the court held an only sharing of profits does not
construct a partnership and existence of other elements are required as well.
Application-1
In this case, Julio, Carolyn and Trisha have written some rules on a paper to start their
business. Each of them performs different functions in the business, for example, Julio
specialised in tax, Carolyn in accounting and Trisha in investment advice. The business
is run by the contribution of each party, and they are carrying out its operations
(Goudberg v Herniman Associates Pty Ltd). Each partner has a mutual obligation, and
they are operating the business in common (Re Ruddock). Lastly, the objective of
establishment of the business is to generate profits for the business and partners.
Thus, all the elements of a partnership are present in this case based on which a
partnership has formed between Julio, Carolyn and Trisha. Sarah, on the other hand, is
not interested in the business. She is an artistic person, and she did not involve in the
operations of the business. She shared the profits of the business but does not get
involved in its operations, and she did not carry out the business in common with
other partners. Only sharing of profits is not enough to consider Sarah as a partner of
the business (Plummer v Thomas), therefore, she is a creditor of the business.
Conclusion-1
Conclusively, a partnership business structures have formed in this case because all the
elements of a partnership are fulfilled based on which Julio, Carolyn and Trisha are the
partners in the business. Sarah is a creditor because she only shares the profits of the
business but did not carry out its operations in common with other partners.
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Answer-2
Issue-2
The key issue, in this case, revolves around the liability of Julio and other members
towards X for the loss suffered by him by acting on the advice of Julio.
Rule-2
A person can file a suit for misrepresentation if a party who owes a duty of care made
a false statement regarding a fact in order to attract another party to enter into a
contract and due to reliance on such statement, the person suffered a loss. It is divided
into three categories: negligent, fraudulent and innocent misrepresentation. There are
certain elements which are necessary to be present in order to file a suit for
misrepresentation. The person against whom a suit is filed must make a false
statement to another party regarding a fact because a suit cannot be filed for a
personal opinion or estimation. A helpful example was given in Hedley Byrne & Co v
Heller & Partners case. In this case, the court provided that it is a duty of the defendant
to avoid making any false statement which causes harm to other individuals and such
duty is implied by the law. In Shaddock & Assocs. v Parramatta City Council case,
Shaddock asked the council whether there are any road widening products and the
council denied.
Later a compulsory road widening project was established by the council due to which
Shaddock suffered loss. Shaddock sued the council for damages, and the court held
that a duty of care extends to advice which is given in ‘serious circumstances’. While
giving advice, professionals have to ensure that they maintain a standard of care which
any reasonable person would in such situation. In Smith v Land and House Property
Corp, the court provided that a party can be held liable for making a false estimation or
opinion if such party is in the position to know the facts. The loss suffered by the party
duty to a false statement must not be too remote, and it should be the direct
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