Question

Keith, Greg and Bob enter into a partnership agreement in 2018 to run their auto parts business called “Auto Spider”. Keith and Greg are expert mechanics while Bob has many years of experience as a spray painter in the auto parts industry. The partnership agreement does not make any mention of expulsion powers, profit or loss sharing or duration or dissolution of the partnership. Keith, Greg and Bob agree that all major expenditure would require their joint agreement. The partners rent a warehouse in Yatala from which they operate their business, which is successful and grows rapidly. Bob convinces Keith and Greg to buy a larger warehouse, as they could hold more stock and greatly increase their market share. Keith, Greg and Bob enter into a contract to buy a large warehouse in Coomera when their current lease on the Yatala warehouse expires in three months. Bob visits the Coomera warehouse for a final inspection prior to Auto Spider moving into the building. While examining the site, Bob engages in conversation with the real estate agent who is managing the property, who shows Bob the adjoining block of land and asks Bob if he would be interested in buying it. Bob sees an opportunity to further expand the business and immediately agrees to buy the land for $200,000 on behalf of the partnership, without discussing it with Keith and Greg. Bob authorises a payment of 20% of the cost of the land to be paid by direct debit from the partnership’s bank account. The real estate agent gives Bob a gift voucher worth $5,000 to Cunnings Hardware as a “thank you gift” for buying both properties. Bob decides to keep the voucher for his own personal use. Bob does not inform either Keith or Greg about the land purchase. Two months later, Keith and Greg discover the purchase after reviewing the partnership bank statements and they are infuriated. Keith and Greg refuse to pay for the land purchase. Bob, who considers himself to be a fine art expert, hears of an exhibition by a well-known Australian artist. He attends the exhibition on Friday night and sees a painting that looks like a real bargain at $30,000. He buys the painting using Auto Spider’s credit account, saying to the seller that it will look great in the entryway to the auto parts business. Bob does not mention the purchase to his other partners, but several days later contacts a friend who deals in art and asks if he would like to buy the painting for $45,000. The friend agrees and Bob does not mention the sale to Keith and Greg. He deposits the profit of $15,000 into his personal savings account. When Keith and Greg find out about Bob’s actions, they decide that they can no longer trust Bob and they would like to know what steps they can take in relation to the partnership. Advise the partners of Auto Spider as to whether they are liable to pay for the purchase of the land, whether Bob has breached any duties to the partnership, what money the firm can recover from him (if any) and whether Keith and Greg can expel Bob or bring the partnership to an end. Using the ILAC method, explain your answers by making reference any relevant sections of the Partnership Act 1891 (Qld) and the relevant supporting case law. You only need to refer to sections and cases relating to partnership law. Do not discuss any legal principles, sections or cases on contract law or tort law which was covered in Module 1.

Answer 1

In the given case, the questions divided in four parts:

Part –I: Advise the partners of Auto Spider as to whether they are liable to pay for the purchase of the land.

Part-II: whether Bob has breached any duties to the partnership?

Part-III: what money the firm can recover from him (if any)?

Part-IV: whether Keith and Greg can expel Bob or bring the partnership to an end?

The answers are provided in ILAC method which stated that:

I: What is the issue?

L: What is the Law?

A: How it will apply?

C: Conclusion.

Part –I: Advise the partners of Auto Spider as to whether they are liable to pay for the purchase of the land

Answer:

What is the issue: Bob has purchased land on behalf of firm without the consent of other partners.

What is the Law:

Section 8 (1) (Power of partner to bind the firm) states as under:

Every partner in a partnership, other than a firm that is a limited partnership or incorporated limited partnership, is an agent of the firm and his or her other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way of business of the kind carried on by the firm of which the partner is a member bind the firm and his or her partners, unless— (a) the partner so acting has in fact no authority to act for the firm in the particular matter; and

(b) the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner.

How it will apply: As observed, the act of partner on behalf of firm binds on the firm and other partners. In the given case, Bob has purchased land on behalf of firm and all partners are jointly and severally liable.

Conclusion: Keith and Greg are also liable for purchase of land by Bob on behalf of firm.

Part-II: Whether Bob has breached any duties to the partnership?

Answer: Bob has taken decision alone instead of joint agreement as decided. Firstly, he finalized the deal of land purchase and took gift voucher of $5000 for personal use. Thereafter, he utilized firm’s account for purchase of painting of $30000 without the consent of other partners. Further, he sold that painting at $45000 and took $15000 (profit) to his own account.

The action of Bob was in contravention to the Partnership Agreement as it was decided to decision with joint agreement but Bob was not following the set rules. Bob has breached the trust of partners and failed in duties of partnership.

Part-III: What money the firm can recover from him (if any)?

Answer:

As per section 10 partnership act 1891,

“(1) If one partner pledges the credit of a firm, other than an incorporated limited partnership, for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless the partner is in fact specially authorised by the other partners.

(2) If a general partner pledges the credit of a firm that is an incorporated limited partnership for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound unless the general partner is in fact specially authorised by the firm.

(3) This section does not affect any personal liability incurred by an individual general partner.”

In view of above no amount can be recovered from Bob

Part-IV: Whether Keith and Greg can expel Bob or bring the partnership to an end?

Answer:

What is the issue: In the given case, we see that Bob has taken decisions on his own without taking consent of other partners even though it was agreed that all decisions will be taken judiciously. Bob has also misutilized firm’s account by purchasing the painting and then sold the same and diverted the profit to his own account. The action of Bob was prejudicial to the interest of firm.

What is the Law: Section 28 (Expulsion of partner) of Partnership Act, 1981 states as under:

“A majority of the partners cannot expel a partner unless a power to do so has been conferred by express agreement between the partners”.

Section 38 (Dissolution by the court) states that:

- if a partner, other than the partner suing, has been guilty of conduct that, in the opinion of the court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business.

- if a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself or herself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with the partner.

How it will apply: In the given case, as noting is mentioned in the agreement regarding expulsion of partner, Keith and Greg cannot expel Bob. Hence, considering the act of Bob as prejudicial to the interest of the firm, they may dissolve the firm through court.

Conclusion: Keith and Greg can approach court for dissolution of firm citing reason as action of Bob for breach of trust and his decisions are prejudicial to the interest of firm.