A partnership can be described as a relationship that is present between the persons who are carrying on business in common and with a view to earn profit. In case of a partnership, there is an agreement between two or more persons who have created a legally binding relationship and such relationship is essentially of contractual nature. In Green v Beesley (1835), Tindal CJ stated that although it is believed that the definition of partnership includes mutual participation but a legal entity is not created when the parties create a partnership. The provisions of partnership law are derived from case law and also form the statute law. In this regard, the relevant legislation is present in the form of the Partnership Act. A partnership is considered as a branch of the agency law. The main characteristics of a partnership are mutuality of rights and obligations. Each partner in a partnership is considered as an agent as well as the principal of other partners and the partners owe fiduciary duties towards the other partners. The result is that the partners bind each other and at the same time, they are also bound by the actions of the other partners to the partnership.
Section 5 of the Partnership Act deals with this issue. In this context, this provision of the Act provides that every partner has to be considered as an agent of a can also the other partners regarding the business of the firm. The result is that the acts of each partner, that have been performed by getting on the business of form in the usual way in which the business of that kind is carried on, binds the other partners and the firm unless while doing so, the partner did not have any authority to act on behalf of the firm in that particular way and the third-party one-sided affair of the lack of authority of the partner or does not know or believe the person to be a partner.
While it has been mentioned earlier that partnership can be considered as a branch of agency law. But there is a significant difference present in this case. Therefore in case of a partnership, the partners are considered as principal as well as an agent. The result is that the partners owe two way fiduciary duties. As the partners owe fiduciary duties towards each other, when a partner acts as an agent of the firm, such partner will owe duties towards the other partners and at the same time, the other partners will also have certain duties towards such an agent (Phillips-Higgins v Harper, 1954).
In Re Agriculturist Insurance Co (Baird’s case) (1870), James LJ described the basis for the fiduciary relationship that exists between the partners. It was stated that partnerships are essentially different from joint stock companies. In case of ordinary partnerships, the law assumes that they are based on mutual trust and confidence of the partners. The result is that between the partners and the outside world, each partner is considered to be the unlimited agent of the other partners regarding every matter that is associated with the business of the partnership and that is not in nature, outside the scope of the partnership. Therefore, a partner can bind the other partners by contracts of any amount.
It has been mentioned in section 9 of the Partnership Act that each partner of the firm is considered to be jointly liable with other partners of the firm regarding the debts and obligations of the firm that have been incurred by the firm while such person was a partner. Similarly in the event after the death of the partner, the estate of the person is severally liable in due course of the administration of these debts and obligations as far as the unsatisfied. In this context, the joint liability of the partners means that even if the liability has been incurred by two or more persons, the right of action available against these persons will be only one. Therefore, after a judgment has been entered against the partner or the partners of the firm, the outsiders cannot bring any further action against the other partners if such partners could have been jointly liable if they would have been made part of the action.
The law provides that the partners will be held liable for the debts of the partnership when a partner or any other person has been authorized by them to enter into a transaction on behalf of the partnership firm. Therefore in such a case, the normal rules of agency law will be applicable according to which is the agent was acting within the scope of his or her authority, the partners will be considered to be bound by the transaction. In the same way, when one of the partners have been authorized by the other partners to act on behalf of the partnership, on the other partners will be held to be bound by the authorized action of such a partner. In this regard it is immaterial if the transaction was within the scope or the partnership business or if the outsider was aware of the fact that the agent was a partner. The only effect that is relevant in this case is that the transaction has been organized by all the partners and therefore they are held liable. The other partners are also liable when one partner has acted without the express authorization, under the circumstances where the requirements mentioned in section 5 of the Act have been satisfied. In such a case, the authorities conferred on the person due to the fact of such person being the partner. In this regard, the following requirements have to be satisfied. The act or the transaction should have been entered into by a partner; such acts should fall within the scope for the business that is generally carried on by the firm; the act should have been effected in the usual way; and the other party should either know or believe that the person acting on behalf of the firm is a partner but should not be aware of the lack of authority on part of such a partner.
These are the circumstances under which the potential liability of a partner can be restricted.
The issue that arises in this case is it Marlin Fishing Pty Ltd can be held liable for the contract that was created by one of its directors, Michael as the Constitution of the company provides that before entering into a contract on behalf of the company, it should be approved by the directors of the company and the company sees needs to be affixed on such a contract along with the signatures of two directors of the company. But in this case, Michael had entered into a contract for purchasing a new boat with Commercial Vessels Pty Ltd. under these circumstances the issue is if Marlin Fishing Pty Ltd is bound by the contract created by Michael and if there are any consequences for Michael.
According to the law, a company is considered to be having its own legal identity (Salomon v Salomon). But a company has to be represented by individuals in its dealings with outsiders. Therefore, a company can enter into contracts under its own name but it can do so through individuals were acting on behalf of the company (Carroll, 1996). However in such a case, a problem may arise. What will be the effect of the document that has been created by the person representing the company that goes against the will of the company? Whether such a contract can be enforced against the company or not? The law provides that the directors all other officers of the company can act as the agents of the company while exhibiting a transaction on behalf of the company. In such a case, no financial risk is assumed by the agent in the transaction. The agent only acts to create a contract between the principal and the third party. An agent, for example, a director of the company has a number of duties towards the company (Carroll, 1995). For example the person is required to act in good faith and in the best interests of the corporation. It is also the duty of such a person to avoid any actual or probable conflicts of interest. If these duties have been breached by the agent, the person may be sued by the company.
In this regard, the authority of the agent can be described as actual authority and apparent authority. As mentioned above, a company can enter into contracts to an organ like the board of directors or by using an authorized agent. However in such a case, a person may arise regarding the enforceability of the contract against the company if there is an irregularity, like the failure to comply with the constitution of the company or replaceable rules (Baxt, 1991). In this regard, it has been mentioned by the court in National Australia Bank Ltd v Sparrow Green Pty Ltd (1999) that the leader director of the company can act on behalf of the corporation even in such a person does not have the actual authority to do so. In this case, the company was required to return the money that has been borrowed from NAB as the director having the authority to deal with the company had a special status. The result was that in this case, the company was considered to be bound by the agreement. In another similar case titled Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1957), the High Court stated that the director of the company did not have the apparent authority because the representation regarding the authority to act on behalf of the company cannot come from an agent but it should come from the company.
As mentioned above, company can either enter into a contract directly or indirectly by using an agent to act on its behalf. Such a contract will be considered to be binding unless the agent did not have the authority to enter a contract on behalf of the company. Such a contract will be binding even if certain rules of internal procedure of the company have not been followed (Bryan, 1995). In this regard section 128, Corporations Act provides that while dealing with the company, there are certain assumptions that can be made by the outsiders. It was seen in Lyford v Media Portfolio Ltd (1989) that it is easier to rely on these assumptions as compared to using evidence regarding these matters. It also needs to be mentioned that individual directors, managing directors and compensate these are always considered as the agents of the company. In this regard, section 129 of the Act provides that the assumptions mentioned in this section can be made by the outsiders (Campbell, 1960). According to section 129, it can be assumed by an outsider that a person, who has been held out by the company as being an officer or the agent of the company, has the authority to act on behalf of the company. Moreover, it can be assumed by the outsiders under this section that such an officer or agent has properly performed their duties towards the company (Bird, 1999).
The statutory exemptions are based on the indoor management rule. This rule was provided by the court in Turquand's case (Royal British Bank v Turquand, 1856). In this case, protection was provided to the innocent third parties who were dealing with the company and could not know if the internal rules of procedure have been complied with or not. Therefore a person who is dealing with a company can assume that all the internal procedures of the company are complied with while entering into a transaction on behalf of the company.
In the present case also, Commercial Vessels Pty Ltd did not have any means to find if the internal rules of Marlin Fishing Pty Ltd have been complied with or not. As a result, Dan, Terence and Pat cannot deny the contract and Marlin Fishing will be bound by the contract created by Michael. However, as an agent, Michael does not incur any liabilities in this contract. He can be held liable only if he is found to be in breach of his duties as the director of the company.
Baxt R, 1991‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of Ultra Vires’, 19 Australian Business Law Review147
Bird J,1999, ‘The Duty of Care and the CLERP Reforms’ 17 Company and Securities Law Journal 141
Bryan M,1995, ‘Cleaning Up After Breaches of Fiduciary Duty – the Liability of Banks and Other Financial Institutions as Constructive Trustees’ 7 Bond Law Review 67
Campbell I,1960, ‘Contracts with Companies’, 76 Law Quarterly Review115
Carroll R,1995, ‘Proper Performance of Duties by Company Officers: The Statutory Assumption in s 164(3)(f)’ 69 Australian Law Journal 200
Carroll R,1996, ‘Third Party Liability for Corporate Activity: Recent Developments’, 26 Western Australian Law Review 332
Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1957) 33 CLR 72
Green v Beesley (1835) 2 Bing N C 108
Lyford v Media Portfolio Ltd (1989) 7 ACLC 271
National Australia Bank Ltd v Sparrow Green Pty Ltd (1999) SASC 280
Phillips-Higgins v Harper  1 QB 411
Re Agriculturist Insurance Co (Baird’s case) (1870) LR 5 Ch App 725
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