PACC6009 Business Law | Business of the Partnership Firm
Questions:
Question 1
Tina appoints Brad as checkout operator at her independent garage which she operates as a sole trader. The business operates both as a service station and as a used-car lot.
Tina contracts glandular fever, and during the four months she is off work, she tells Brad that he can order petrol while she is sick. During this period, Brad negotiates supplies with Caltex. Brad orders fuel from Caltex every fortnight. Tina returns from her illness, and tells Brad that he should no longer order petrol and that matters will be conducted as they were before she was ill. However Brad, who enjoys the increased status of dealing with the oil companies, ignores Tina’s instruction, phones Caltex and orders 30 000 litres of fuel. When the truck arrives to deliver the fuel, Tina is furious (as she has already entered into a more advantageous arrangement with BP). She phones Caltex, and denies that there is a contract between her and Caltex, stating that Brad was acting contrary to instructions when he placed the order.
Tina employs Paul as a salesman of the used vehicles. Paul has several years experience in the second hand vehicle market. Tina has a number of vehicles on display, including a 2012 Holden Commodore Wagon, priced at $ 19 000. She does not realise that the vehicle could easily fetch $ 25 000. Paul however does know this, and also that his next door neighbour, Fred, wants to purchase just such a vehicle. Paul says that he needs a vehicle himself, and buys the wagon from Tina for $ 19 000. He then sells it to Fred for $ 25 000;Tina is furious when she finds out what has happened. Advise Tina as to her legal position in relation to the above situations, citing relevant authority.
Question 2
Simon, George, Sara and Mary were all employed by different IT companies. However, they felt that they could do better if they went into business themselves. They pooled their available cash and drew up a partnership agreement, which stated that each partner had authority to enter into transactions on behalf of their IT firm, which they called Computer Solutions. The firm operates in Sydney and provides a service of storing data for customers. The agreement states that partners have authority to enter into contracts of up to $ 10 000, but that any contract for more than that must be approved unanimously by all partners.
George, Sara and Mary approach you for legal advice in relation to two transactions entered into by Simon, who had acted without referring back to the partners. On was for a 500TB storage drive, bought by Simon on behalf of Computer Solutions, from Sunstar Computer Hardware Ltd, costing $ 12 000.
The other was for a second-hand ute, costing $ 9 000, which Simon ordered for the firm from You Beaut Ute Ltd, on the basis that the partnership should branch into the freight business.
George, Sara and Mary have refused to accept delivery of both the storage drive and the ute and the partnership has been sued by both Sunstar Computer Hardware Ltd and You Beaut Ute Ltd. Give George, Sara and Mary legal advice, referring to relevant statutory and case law authority.
Answers:
Question 1
Issue
The issue in the given case is to extend an advice to Tina regarding her rights in the two cases mentioned below:
Case 1: Would contractual liabilities be enforceable on Tina on the account of the fact that Bred the agent of Tina has formed a contract with Caltex on behalf of her when he had no requisite authority?
Case 2: Does Tina has the rights to demand for the secret benefits generated by her agent Paul under the process of self-interest activity on the account of a vehicle acquired from her at lower price?
Law
There are three main parties that are to be considered in agency law which are highlighted below (Harvey, 2009).
- First party is known as principal
- Second party is known as agent
- Third party is the outsiders which enter into the legal relations with the agent.
A person who has the power for enacting contracts with the other parties and has the power to appoint a person to conduct certain specific work on behalf of principal is named as principal. The principal has the authority to appoint or authorized any person by extending some of the implied authority that the agent can use and create various legal agreements on behalf of the principal. It is the responsibility of the agent to take care of the interest of principal and use the power to enact the agreements in good faith (Lindgren, 2011). Moreover, it is noteworthy that when the agent has formed an agreement with the third party, then the obligations of the agreement would become enforceable on the concerned principal only if the third party has entered into relation with the good faith (Carter, 2012).
There would be a formation of indirect legal relation of the third party with the principal on the account of the agreement created by the respective agent. Moreover, there is no obligation present on agent’s part in context of the obligations arising from the enacted agreement. Third party cannot blame the agent for breaching any contractual obligation. It is because the agent is mainly the representative of the principal (Andrews, 2011). The highlighted obligations must be on behalf of the principal only. If the agent has created any agreement beyond the threshold limits of the authority, then it is essential that all the respective acts or agreement created by agent must be informed to the principal. In this regards, it is also imperative that if the principal has revoked the authority from the agent, then it is essential that principal must update the third party that the concerned agent does not have any more liability to enact such legal agreements (Latimer, 2016). According to the Freeman& Lockyer v Buckhurst Park Properties (Mangal) Ltd[1964] 2 QB 480case, if the agent who has no authority to create agreements has made an agreementwith the party then the resultant obligations would be applicable on to the principal (Gibson & Fraser, 2014).
Further, the rights of the concerned third party who does not have any clue regarding the limited authority of the agent would be defended as per the indoor management rule (Section 128 & 129, Corporations Act, 2001). The principal has bounded to satisfy the obligations of the agreement made by the agent. The Royal British Bank v Turquand(1856) 6 E & B 327 case is the testimony of this factor (Davenport & Parker, 2014)
It is imperative to note that principal has the legal authority to take immediate action against the agent on the account of not obeying the instruction of the principal. Moreover, as per common law, the principal can recover the amount of shortfall incurred due to the agreement formed by the agent. It is because there are some “fiduciary duties” present on behalf of the agent that must be taken into account while creating legal agreements with the outsider parties (Latimer, 2016). Further, the agent must not make any work or agreement of private interest because agent is working on behalf of the principal and it is the obligation of agent to perform the acts which are best of interest of principal only. As per the Bentley v Craven (1853) 18 beav 75 case, if the agent makes any secret benefits through any agreement then in such cases the principal has the legal authority to demand for the benefits (Harvey, 2009).
Application
In this case, Tina is a sole trader and operates a garage. She (principal) has authorised Bred (agent) to enact the legal relation with the other parties on behalf of her. It is because she was severe suffered from fever and was out from work for four months. However, when she returned back to garage, she revoked Bred’s authority of making the agreement with the third party. However, Bred enacted an agreement with Caltex irrespective of the withdrawal of the authority. In this case, Tina needs to make a notification to the oil companies that Bred is not more authorized to create agreement. Further, Caltex is the innocent party who does not know that Bred is not having the requisite authority. Therefore, Tina is liable to complete the duties highlighted in the agreement made by Bred.
In second case, Paul has been appointed on behalf of Tina as sales manager. Tina has offered a price of $19,000 for a wagon. Paul knew well that the commercial worth of wagon was nearly $25,000. However, he purchased the wagon from Tina with the offered price and secretly sold it to his neighbour Fred in $25,000. It is apparent that Paul has made an act of private benefit from his principal. Therefore, Tina has the authority to recover the amount of benefits made by Paul.
Conclusion
In case one Tina is accountable to complete the liability of the agreement formed with Caltex but has the authority to sue Bred for breaching the duties. Moreover, in second case, Paul has made private benefits from Tina and hence, Tina has the legal authority to recover all the benefits made by Paul. Also, she can sue Paul if he denies issuing the profit to her.
Question 2
Issue
The issue in the given case is to comment on the accountability of the other partners of the Computer Solution partnership firm on the account of the contract made by one partner Simon.
Law
There is no legal identity present for a partnership business structure. Hence, the partnership firm is represented by the concerned partners of the firm. They have the liabilities and rights on behalf of the partnership firm. In the formation of a partnership firm, two or more partners enact an agreement (known as partnership agreement) in regards to generate the profits by carrying the business action (Lindgren, 2011). The rules and norms of the partnership agreement may vary from state to state but the overall conclusion can be drawn with the fact that in the partnership agreement, the partners list the division of the profit as well as the requisite authority that can be used to create the legal contracts with the other party on behalf of the partnership firm. In this regards, the applicable statute is “Partnership Act 1892 (NSW)” that comprises both the aspects essential in the partnership firm and amongst partners (Gibson & Fraser, 2014). As per the section 5 of Partnership Act, it is critical to note that the partners are the representative of the partnership firm and work as agents on behalf of the firm. Any particular act conducted by any one partner would be accountable as a contract entered into by the firm only. The agreement could be enacted either in oral form and written form (Harvey, 2009).
Further, any of the partners has the power to enact a contract for the firm but it is essential that the contract must be related to the business only. Any work or act which does not have any influence with the business of the partnership firm would not be considered to be legally binding on the firm or on the other partners. In such scenario, the responsibility of the act of the partner would be applicable on that partner only (Carter, 2012). Further, if the partner who already knew the threshold limit of the transaction of implied authority but still has created an agreement with the outsider parties, then it would be considered as enforceable provided the other parties have entered with the “good faith” and do not have any single clue that the representative of the firm does not have sufficient authorization and made necessary assumptions as per section 128 and 129 of Corporation Act 2001 (Davenport & Parker, 2014). The rights of the parties would be considered to be safeguarded under the provision of section 129 of the Corporation Act 2001 (Latimer, 2016).
Application
Simon with other three partners has created a partnership firm while fixing a threshold limit of the transaction of $10,000. It means, any partner has the privilege to enact an agreement within the consideration of $10,000 and if the transaction is of more than the specified implied limit, then it is essential that the partner should discuss with the other concerned partners of the partnership firm (Computer Solution). Simon has made an agreement which comprises a transaction amount of $12,000 with Sunstar Computer Hardware Ltd. Moreover, he has not discussed regarding the agreement with the other partners and also Sunstar Ltd was not aware that Simon did not have the rights to make an agreement with a consideration amount of $12,000. Further, it is apparent that the agreement is related to the business activity only because he has ordered 500 TB storage drives from Sunstar Ltd which is considered to be an act associated to the business only. Moreover, he has acted as an agent for the Computer Solution and therefore, the other partners are also having the same obligation to make the payment of the agreement to Sunstar Ltd on the account of the purchase of storage drives. Because, necessary protection would be extended to the innocent part who has assumed that Simon has required authority for the agreement.
Simon has made another transaction with a consideration of $9,000 to buy an old Ute from You Beaut Ute Ltd. It can be said that the transaction is within the limit of the privilege decided by the partners of the firm at the time of making partnership agreement. However, the other partners would not liable on to the account of this transaction because it is apparent that the business of the partnership firm is related to the computer solution not related to the vehicle. Further, there is no correlation is present between the business of the computer solution and the acquired Ute and hence, it can be said that partners do not have accountability towards the agreement made by Simon with You Beaut Ute Ltd, irrespective of the fact that the agreement has enacted within the limit of the authorization. Hence, only Simon is responsible for the obligation of the agreement and the third party i.e. You Beaut Ute Ltd cannot sue the other partners for the agreement made.
Conclusion
It is apparent from the case facts and the respective laws that all the partners are accountable for the obligation of the agreement made by Simon with the Sunstar Computer Hardware Ltd because Simon has worked as an agent and made the agreement which is related to the business activity only. Further, Sunstar has created the agreement by assuming that Simon has relevant authority. Therefore, requisite immunity would be provided to the Sunstar and hence, the other partners have to accept the ordered amount from Sunstar and have to make a payment of $12,000. Additionally, in case when Simon has enacted an agreement with You Beaut Ute Ltd regarding the buying of the old Ute would not create any accountability for the other partners because Ute does not have any correlation with the business of the firm.
References
Andrews, Neil, (2011). Contract Law (3rd ed.). Cambridge: Cambridge University Press.
Carter, J. (2012). Contract Act in Australia (3rd ed.). Sydney: LexisNexis Publications
Davenport, S. & Parker, D. (2014). Business and Law in Australia (2nd ed.). Sydney:LexisNexis Publications.
Gibson, A. & Fraser, D. (2014). Business Law (8th ed.). Sydney: Pearson Publications.
Harvey, C. (2009). Foundations of Australian law (2nd ed.). Prahran, Vic.: Tilde University Press.
Latimer, P. (2016). Australian Business Law CC (5th ed.). Sydney: LexisNexis Study Guide.
Lindgren, KE. (2011).Vermeesch and Lindgren's Business Law of Australia (12th ed.). Sydney: LexisNexis Publications.
