Partnership

LAW OF ASSOCIATIONS

TOPIC 3
PARTNERSHIP

Definition
A partnership is the relationship which exists between persons carrying on a business in common with a view to profit. It involves an agreement between two or more parties to enter into a legally binding relationship and is essentially contractual in nature. According to Tindal CJ in Green v Beesley (1835) 2 Bing N C 108 at 112, ‘I have always understood the definition of partnership to be a mutual participation ...’, yet the participants do not create a legal entity when they create a partnership. James LJ in Smith v Anderson (1880) 15 Ch D 247 at 273 saw the concept in the following way:
An ordinary partnership is a partnership composed of definite individuals bound together by contract between themselves to continue combined for some joint object, either during pleasure or during a limited time, and is essentially composed of the persons originally entering into the contract with one another.

Despite these definitions, there are limitations on the number of persons that can form a single partnership. See Corporations Act A partnership will have a name (called a firm name) and this is registered under one of the state Business Names Acts.

Partnership law derives both from case law and from statute law. The relevant legislation is to be found in the Partnership Acts 1892 (NSW). This area of the law has been described as a special type of agency. The main reason for this is that partners, when acting in the course of the partnership business, are acting as agents for one another: see Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11.

Determining when a partnership exists
Necessary elements
Section 1 of the Partnership Act provides that three elements must be satisfied in order to establish the existence of a partnership. These elements are:
 the carrying on of a business;

 in common;

 with a view to profit.
If one of these elements is missing, the relationship is not one of partnership.
Carrying on of a business
The task of determining what is meant by the phrase ‘carrying on business’ has raised the issue of whether there is a need to establish some repetitiveness of action, as opposed to isolated action taken by parties. A number of early decisions emphasised the need for continuity or repetition. In Smith v Anderson (1880) 15 Ch D 247, a group of investors subscribed for the purchase of shares through a trust in various submarine cable companies. The shares were sold to these investors by the trustees of the trust who then issued certificates to the subscribers. A £100 certificate was issued for each £90 certificate that was subscribed. Smith, along with more than 20 other people, received a certificate. Later Smith applied to wind up the trust on the basis that it was an illegal association under s 4 of the English Companies Act 1862. Section 4 of this Act provided so far as was relevant:
No company, association or partnership consisting of more than twenty persons shall be formed after the commencement of this Act for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered.

The question was whether the trust was a partnership. The court looked at the nature of the trust and of the relationship of those involved in it. Although each holder of a certificate could elect trustees of the trust and received a trust report, and the elected trustees had certain management powers, including the power to sell the shares and to reinvest or distribute the proceeds, it was noted that the trustees had no power to speculate and that there were no mutual rights and obligations amongst those involved. In these circumstances, the court held that the trust was not a partnership as there was no association for the purpose of ‘carrying on a business’.

According to Brett LJ at 277-8:
The expression ‘carrying on' implies a repetition of acts and excludes the case of an association formed for doing one particular act which is never to be repeated. That series of acts is to be a series of acts which constitute a business ...The association, then, must be formed in order to carry on a series of acts having the acquisition of gain for their object.
The same judge, then Lord Esher MR, stated in Re Griffin; Ex parte Board of Trade (1890) 60 LJQB 235 at 237:
If an isolated transaction, which if repeated would be a transaction in a business, is proved to have been undertaken with the intention that it should be the first of several transactions, that is with the intent of carrying on a business, then it is a first transaction in an existing business.
In Re Griffin, Griffin bought a piece of land with the intention of building cottages on it and then selling them. However, at the time of entering into this building speculation, he had no money. He had also undertaken certain contracts for making roads, which he could not carry on without borrowing money to pay for the labour and materials.
One of the questions facing the court was whether Griffin had entered into business as a builder. The court concluded that there was no evidence that this was the first of an intended series of transactions.
Similarly, in Ballantyne v Raphael (1889) 15 VLR 538, a syndicate of more than 20 persons had been formed to acquire a large block of land. The intention was to subdivide the land and sell individual allotments at a profit. The court, which approved of Smith v Anderson, held that this was not a company, association or partnership carrying on business for gain. It was an isolated act, not repetitive.
However, the necessity of establishing an intention to continue in business has been overlooked in some cases. In Ford v Comber (1890) 16 VLR 541, Holroyd J admitted of the possibility that an agreement to share the costs of acquiring a single block of land and the profit on resale could constitute a partnership between the parties. Similarly, the decisions in Trimble v Goldberg [1906] AC 494, Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd [1961] SR (NSW) 165 and Playfair Development Corporation Pty Ltd v Ryan (1969) 90 WN (NSW) 504 impliedly acknowledged the validity of a partnership in a single venture.
In Playfair Development Corporation, a deed entitled ‘Covenants of Partnership’ was entered into between the following parties:
 the plaintiff company, described as ‘the manager’;

 a trustee company; and

 two directors of the plaintiff company and the plaintiff company, called ‘the partners’.
This deed provided for:
 the purchase by the partners of a parcel of land on which were constructed nine flats;

 the subsequent rental of the flats;

 the transfer of the land and flats to a trustee.
The deed also:
 restricted the partners applying for a separate certificate of title to the property;

 expressed that the manager was not to be a partner of the partnership after it sold the land to the trustee. After the sale it was to be regarded as an independent contractor;

 gave the partners power to remove the manager.
The plaintiff company purchased the land which it transferred to the trustee. The plaintiff company then carried on the business of renting the flats to tenants as well as managing the buildings. It was the intention of the partners to offer partnership units to members of the public for purchase. Advertisements were inserted in newspapers to achieve this. Each of the units was ‘one twentieth of the capital of the partnership’ and the units were to be transferable without bringing about dissolution of the partnership. The advertisements attracted the attention of the Register of Companies who argued, among other things, that a ‘prescribed interest’, defined in the Companies Act 1961, was being offered to the public. In such cases, the Registrar argued, a registered prospectus was needed. The plaintiff argued that they were exempted from having to satisfy the prospectus requirements because the Companies Act specifically excluded ‘any interest in a partnership agreement ...’ from the definition of an ‘interest’.
The Court held that there was a partnership notwithstanding that the partnership units were transferable. According to Street CJ, who distinguished the case from Smith v Anderson (1880) 15 Ch D 247, stated at 666-7 that:
The ‘partners', whether they be the original three, or whether they be 20 members of the public who respond to the plaintiff's invitation, are bound together by the covenants. The object of that combination is the earning of profits from the letting of units in the block of flats held by the trustee on behalf of the partners. The manager, albeit an independent contractor, is in every sense the manager of the business. The business is that of the partners...The partners do not have independent interests in the partnership property or in the partnership business. They may well be physically remote from each other. But it seems to me inescapable that they submit themselves to mutual obligations by the terms of the deed of covenant...
The High Court was faced with a similar issue in Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321. In this case, a company named Fourth Media Management Pty Ltd (“FM”) entered into contracts with singers Elton John and Cilla Black for performances in Australia. Volume Sales (Finance) (“VS”) agreed to finance the contracts.
Later, an agreement was made between FM and VS whereby it was agreed:
 that FM assign to VS a one half interest in the contracts with the singers;

 that the arrangement between FM and VS was to performed as a ‘joint venture’;

 that VS was to finance the contracts by way of a loan and that this loan was described as a ‘loan to the joint venture’ which was repayable prior to the distribution of profits;

 that the accounts show that the money advanced was a loan;

 that all profits were to be shared equally between the parties;

 that all policy matters were ‘to be agreed upon by the parties hereto’;

 that a bank account of VS be opened and be operated ‘in such manner as VS sees fit’;

 that the money loaned would be repaid if the contracts with the singers failed.

One day after this agreement was made, FM granted an equitable charge over its undertaking and property including its interest in the box office proceeds of the contracts to Canny Gabriel Castle Jackson Advertising Pty Ltd, the appellant. The question was whether VS’ interest would prevail over the later equitable charge. If the arrangement between FM and VS was a partnership, then VS would have a beneficial interest which would prevail over the charge. The High Court held that there was a partnership.
Their Honours noted at 327:
In short, it seems to us that the contract exhibited all the indicia of a partnership except that it did not describe the parties as partners and did not provide expressly for the sharing of losses, although we venture to think that it did so impliedly.
Factors which led the court to the conclusion that a partnership existed were stated by McTiernan, Menzies and Mason JJ at 326 as follows:
(1) the parties became joint venturers in a commercial enterprise with a view to profit;

(2) profits were to be shared;

(3) the policy of the joint venture was a matter for joint agreement and it was provided that differences relating to the affairs of the joint venture should be settled by arbitration;

(4) an assignment of a half interest in the contracts for the appearances of Cilla Black and Elton John was attempted, although, we would have thought, unsuccessfully;

(5) the parties were concerned with the financial stability of one another in a way which is common with partners.
The finding by the High Court that the arrangement between the parties was a partnership implicitly acknowledged that a single commercial venture could be a ‘business’ in order to satisfy the requirements set out in the Partnership Act.
The decision in Canny Gabriel Castle Jackson Advertising Pty Ltd was applied in Television Broadcasters Ltd v Ashton’s Nominees Pty Ltd (1979) 22 SASR 552. However in that case it was held that a joint venture for the promotion of a circus tour did not make the participants, partners. The court noted that although the parties became joint venturers with a view to profit and provided for the sharing of these profits, there was no agreement for the sharing of losses and, importantly, the respective obligations contained in the parties’ agreement were regarded as separate obligations. Further evidence for the lack of a partnership was found in the fact that employees were regarded as employees of the defendant and not as employees of the parties jointly. See also Exparte Coral Investments Pty Ltd [1979] Qd R 292.
Another example of where a single activity to be carried out by parties was held to be a partnership is United Dominions Corporation Ltd v Brian Pty Ltd and others (1985) 157 CLR 1. In that case the second respondent, Security Projects Ltd (‘SPL’), was engaged in promoting two distinct but related ‘joint ventures’ involving the development of land which it was buying in Brisbane. One proposed joint venture involved the development of part of the land as a hotel. The other involved the development of the residue of the land as a shopping centre. By September 1973, the participants in each proposed venture had been settled. Brian Pty Ltd was to have a 20% share in the hotel venture and a 5% share in the shopping centre venture. United Dominions Corporation Ltd (‘UDC’) was also to be a participant in both ventures, however SPL was to be the main participant in each proposed venture.
Draft joint venture agreements had been circulated among the proposed participants, but not finalised. It was not until 23 July 1974 that a formal agreement in respect of the shopping centre venture was executed. Approximately 90 per cent of the capital for each project was to be provided by borrowings from UDC, with the remainder being contributed by each of the proposed participants according to their respective shares. The prospective parties to the hotel venture, including Brian Pty Ltd, had, by September 1973, all made payments to SPL as project manager. The prospective participants in the shopping centre project had also made financial contributions, except for Brian Pty Ltd, which made a contribution in November 1973.
In October 1973, SPL mortgaged the land to UDC as security for borrowings for the two ventures. Later two further mortgages were also executed by SPL in UDC's favour.
In August 1974 the hotel project was abandoned and thereafter the whole of the land was devoted to the shopping centre project. The shares of the various parties were rationalised. Eventually the shopping centre was built and sold at a large profit. However, Brian Pty Ltd received neither repayment of the money it contributed nor payment of a share of the profit. UDC claimed to be entitled to retain all profits because of a ‘collateralisation clause’ in a mortgage given to it by SPL before the joint venture agreement was formalised. The effect of this clause was to charge the land with all indebtedness incurred by SPL in the venture.
When SPL went into liquidation, the question was whether UDC stood in a fiduciary relationship to Brian Pty Ltd on the date on which SPL gave to UDC the mortgage containing the collateralisation clause.
The High Court held that UDC stood in a fiduciary relationship to Brian Pty Ltd and had breached this duty. Importantly their Honours stated that fiduciary obligations were not confined to persons who actually are partners, ‘but extend to persons negotiating for a partnership, but between whom no partnership as yet exists’. This meant that UDC could not rely on the collateralisation clause. According to Mason, Brennan and Deane JJ at 2:
the three mortgages upon which UDC seeks to rely were, to the extent that they would authorise UDC to retain Brian's share of the surplus of the `joint venture', given by SPL and accepted by UDC in breach of the fiduciary duty which each owed to Brian.
The agreement of the 23 July 1974, although describing the parties as engaging in a ‘joint venture’ was in essence a partnership agreement dealing with a ‘partnership for one transaction’. On this point Dawson J noted at 15:
The requirement that a business should be carried on provides no clear means of distinguishing a joint venture from a partnership. There may be a partnership for a single adventure or undertaking, for the Acts provide that, subject to any agreement between the partners, a partnership, if entered into for a single adventure or undertaking, is dissolved by the termination of that adventure or undertaking. See, for example, Partnership Act 1892 (NSW), s32(b).
A single adventure under our law may or may not, depending upon its scope, amount to the carrying on of a business: Smith v Anderson (1880) 15 Ch D 247 at 277-278; Re Griffin; Ex parte Board of Trade (1890) 60 LJQB 235 at 237; Ballantyne v Raphael (1889) 15 VLR 538. Whilst the phrase ‘carrying on a business’ contains an element of continuity or repetition in contrast with an isolated transaction which is not to be repeated, the decision of this court in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 suggests that the emphasis which will be placed upon continuity may not be heavy.
This finding, supporting the existence of single venture partnerships, can cause some confusion in regards to non-partnership joint ventures and syndicates. Some reference to this dilemma was made in United Dominions Corporation Ltd v Brian Pty Ltd. On this point the High Court stated at 10:
The term ‘joint venture’ is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture ... will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a ‘joint venture’ and what should more properly be seen as no more than a simple contractual relationship may on occasions be blurred. Thus, where one party contributes only money or other property, it may sometimes be difficult to determine whether a partnership is a joint venture in which both parties are entitled to a share of profits or a simple contract of loan or lease under which the interest or rent payable to the party providing the money or property is determined by reference to the profits made by the other.

Carrying on of a business in common
To constitute a partnership the business must be carried by, or on behalf of, all the partners (Re Ruddock (1879) 5 VLR (IP & M) 51); however, all the partners need not take an active role. In Lang v James Morrison & Co Ltd (1912) 13 CLR 1, an action was brought by an English company, James Morrison & Co Ltd, against three defendants, J McFarland, T Lang and W Keates. The plaintiffs carried on the business of receiving and disposing of frozen meat from abroad. They alleged that the three defendants carried on business in Melbourne as partners under the names ‘T McFarland & Co’ and on occasions ‘McFarland, Lang and Keates’. Before the action commenced, J McFarland and W Keates became insolvent and the action proceeded against their assignees and Lang. At the trial, judgment was given for the plaintiff and Lang appealed to the High Court.
The High Court held that there was no partnership. According to Griffith CJ at 6:
... the real substance of the transaction was that the plaintiffs and Thomas McFarland agreed to enter into a joint venture. They were not partners as against third parties, but each party had certain rights against each other.
Evidence for this finding was found in the fact that separate bank accounts were kept as it was apparent that neither Lang nor Keates operated on the account of T McFarland & Co. Further Lang and Keates took no part in the business of the new firm other than to sign two letters. Griffith CJ saw this as decisive. According to his Honour:
Now in order to establish that there was a partnership it is necessary to prove that JW McFarland carried on the business of Thomas McFarland & Co on behalf of himself, Lang and Keates, in this sense, that he was their agent in what he did under the contract with the plaintiffs.

In the circumstances the court found that there was no such agency.

This position can be compared with Re Ruddock (1879) 5 VLR (IP & M) 51. Ruddock, who carried on business as a sole trader, became indebted to Mrs Bear, the grandmother of one of his employees. The employee was 19 years old. Ruddock entered into an agreement under seal with Mrs Bear whereby she was to purchase a one quarter share of the business - the ultimate benefit would go to the grandson.
Under the agreement:
 Mrs Bear had full control over the share, including the power of disposition (until the grandson attained 21 years, died before attaining such an age or if he displeased her in any way).

 The purchase price of the share was to be treated as having been paid by the discharge of the debt owing to Mrs Bear.

 Mrs Bear would receive a one quarter share of the net profits. However it was expressly agreed that she should not be liable as a partner for any losses and that Ruddock would indemnify her.

 Mrs Bear's name was not to be used and she was not to be held out as a partner.

 Mrs Bear had access to the books and Ruddock was to behave and manage the business ‘as one partner should do to another’.
At a subsequent date, Ruddock consulted with Mrs Bear as to the disposal of another quarter- share in the business and, at all times during the negotiations for the sale of this share, acted on the basis that her consent was essential. Mrs Bear replied that she had no objection to the sale. Later Ruddock became bankrupt and Mrs Bear put in proofs of debts for money paid to Ruddock. The other creditors sought to have these proofs expunged.
The court agreed with the other creditors. Although Mrs Bear took no part in the day-to-day management of the business, she was a partner and could not prove against the estate of the insolvent debtor in competition with his other creditors.
According to Molesworth J at 58:
The general principle of the authorities is, that a right to participate in profits constitutes a partner: and that, notwithstanding stipulation of being dormant or not liable to losses. But there are cases in which it has been held that the relative rights and liabilities of the persons dealing so far varied from those usual between partners, that the general rule should not apply. Many of those cases regard loans which continue to be such. This matter had nothing like a loan; it was a purchase for a price never to be repaid. As to what was said of the grandson, though it may have been the motive for the dealing, no rights to him formed part of the contract. He got nothing which was not subject to Mrs Bear"s discretion. She retained all the rights of a dormant partner.
...The cases show that the relation of partners is the result of their respective substantial rights, not of the words employed, and that the result of the partnership liability from participation of profits cannot be evaded by the form of conveyance. In subsequent matters Mrs Bear and Mr Ruddock treated each other as partners, as to his contemplating to sell another fourth and add another partner, which she was willing to do, but in which they corresponded on the mutual understanding that her consent was necessary...
In Keith Spicer Ltd v Mansell [1970] 1 All ER 462, two individuals, X and Y hoped to establish a restaurant. They intended to form a company for this purpose. Prior to the company's formation and while they were looking for suitable premises, X purchased furniture from a third party and had them delivered to Y’s premises. The furniture was not paid for and the third party thereupon sued Y on the basis that he was in partnership with X. The court said there was no partnership as X and Y were not carrying on business in common but were preparing to do so as a company. Acts carried out in contemplation of a business being undertaken in the future did not point to a partnership. Further, the holding of property jointly did not change things.

With a view to profit
The third limb of the definition confines partnerships to associations formed for making profit. This can be contrasted with clubs and societies formed for the promotion of religious, social, educational and recreational activities and which are not run in order to create profits for the individual members. Lord Linley in Wise v Perpetual Trustee Co Ltd [1903] AC 139 stated at that:
Clubs are associations of a peculiar nature. They are not partnerships; they are not associations for gain; and the feature which distinguishes them from other societies is that no member as such becomes liable to pay to the funds of the society or to anyone else any money beyond the subscription required by the rules of the club to be paid so long as he remains a member. It is upon this fundamental condition, not usually expressed but understood by everyone, that clubs are formed; and this distinguishing feature has been often judicially recognised.
The ‘gain’ mentioned above is pecuniary gain and refers to the gain made between accounting periods. Association members, unlike partners, do not expect to gain monetarily by their membership. They may however gain in other ways by, for example, an improvement in their knowledge or skills, enhanced social status, or personal satisfaction from participation in the associations’s activities. Association members cannot obtain a distribution of pecuniary gains or profits made by the association, although associations can make profits in the furtherance of their objects.
‘Profits' are not defined in the Partnership Act. However, courts have come up with definitions: see Fletcher Moulton LJ in Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 at 98-99, quoted at [17.1]; also see Bond Corporation Holdings Ltd & Anor v Grace Bros Holdings Ltd & Ors (1983) 1 ACLC 1009. Usually courts adopt a simple balance sheet approach in relation to ascertaining whether there is a partnership ‘profit’. This test involves comparing any change in value of the assets of the company at two different points in time. Any gain in value will generally be regarded as a profit.