There to start a partnership. Sarah accepted

There are a number of key
issues that need to be identified as to whether a partnership came into
existence and to who are the partners. These issues are the relation between
Preeti and Sarah, Sarah ordering the hairdryers and Clare’s involvement with
her investment and asking for more control in the business. The question as to
whether or not a partnership exists can be a matter of considerable
significance; as if a partnership does exist the actions of an individual
partner can make all of the partner’s liable to outsiders.

            A partnership is the relation which subsists between two
or more people who carry on a business in common in the view to make a profit1.
It “is a contract of some kind… involving mutual consent of the parties”2 and
like some contracts it need not be written. There is no written agreement
between Preeti and Sarah so the relationship element is vitally important. This
is based partly on agreement between the parties with the intention to enter a
joint venture as partners. Their intention can be express or implied by an
objective outsider. For a partnership evidence of relationship can come from
the words or conduct of the alleged partners. It is clear they have a good
relationship between them from their past from being friends and helping out
neighbours. There is no need for the partners to agree that they are in a
partnership with each other and they can be partners without realising that
they are. The court will be concerned with the substance and not the form of
the relationship3. In Thames Cruises Ltd v George Wheeler Launches Ltd4, the court held
that if the parties entered into a transaction and declared they were not in a
partnership, their statement was not to be ignored entirely but it is simply
one factor to be considered by the court in considering the substance of the
agreement. Section 2 of the Partnership Act (PA) 1890 further lays down rules
that can help determine if a partnership exists but these rules are no more
than an indication. With their previous history, it could be said that when Preeti
asks Sarah for help that’s she offering to start a partnership. Sarah accepted
the agreement by conduct when she goes to look at equipment and orders the
hairdryers were she is carrying on the business in common with Preeti. On the
other hand Preeti may argue that there was no clear intention for entering a
partnership as Preeti only asked Sarah for advice and Sarah exceeded their
agreement when she placed the order. Therefore there would be no partnership
yet, thus the liability for the hairdryer contract is personal to Sarah.  

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

            Business is defined broadly as including every trade,
occupation or profession5.
It is clear that Preeti wants to set up a business with a view to a profit but
it is not necessary for the business to start trade or actually have to make
profit6 in
order for there to be a partnership. In Khan
v Miah7  the House of Lords overruled the Court of
Appeals decision that they had to begin trading and “not merely the
preparation” was enough. In this case the parties got together to open up a
restaurant. They acquired premises, fitted it out and bought equipment but the
relationship broke down and they never proceeded to trade. The question then
arose, who was going to be liable for the contracts that had been signed, the
individual who signed the contract personally would be liable themselves, or
second if a partnership had been formed they would bind their partners in the
business together and they would share liability. The House of Lords held that
the parties had been in a partnership. There was no rule of law that parties
could not become partners until trading actually began. Lord Millett made clear
that it is not enough for the parties to agree to become partners in the future,
it depended on if they had “actually transacted any business of the joint
venture”. Whether or not they had is a question of fact for the trial judge. It
could be seen that when Sarah entered into a contract with the hairdryers that
she is embarking upon that venture so it could be held that they were in a partnership.
Preeti may want to argue that she had no intention of entering into a contract
for twice the amount that she wanted to spend so the venture hasn’t begun,
meaning no partnership.

            Clare’s role needs review as to whether she is a partner
or merely an investor or advisor. If she’s an investor she does not have the
intent required for section 1 of the PA 1890. In order for her to be a partner she
must knowingly hold herself out to be one8.
This was further expressed in Young Legal
Associates Ltd v Zahid9  where even though he was being paid a
fixed sum per annum, the defendant held himself out to be a partner. Clare did
not claim to be a partner at the start she merely invested money and agreed to
work a few hours as cleaner. Section 24(7) of the PA 1890 states that, “no
person may be introduced as a partner without the consent of all existing
partners”. When Clare says she wants more control in the way the business is
run, Preeti has reservations about this and left. Therefore there may be no
agreement for Clare to become a partner. Furthermore people are not liable for
acts done before they became partners unless they agree to be bound10.
The contract for the hairdryers was signed before Clare asked for more control.
Consequently providing that she has not given an indication that she was a
partner, she will not have become a partner under section 24(7) of the PA.

            To conclude, using statue and case law, it is reasonable
for a judge to rule that a partnership has been formed between Preeti and Sarah
as there was a relationship between them to create a business in common. Clare cannot
be considered a partner as she is an investor and wasn’t given the consent
needed to be a partner.

 

B) A partnership cannot have
rights and can’t incur liabilities as it is not a separate legal entity. This
means the partners take all legal responsibility and this is unlimited into all
of their assets. Their personal wealth is at risk to pay off business related
debts relating to partnership business including those entered into by his
partner as every partner in a firm is liable jointly with other partners11. To
find the legal basis of liability of Sarah, Preeti and Clare to those outside
of the firm it is based in the law of agency.

            Every partner is an agent of the business merely by
virtue of the relationship. This position was explained by Lord Justice James
in Re Agriculturist Cattle Insurance Co,
Bairds’s Case12
and has been codified by section 5 of the PA 1890. Contrary to other agency
relationships, the same partner is also a principal with regard to his other
partners who are also his agents. This means each partner is a principal and an
agent at the same time. If the judge finds that Sarah and Preeti are partners
from part A, since Sarah is an agent of Preeti who is a principle, she can bind
her to any contract providing that she is acting within her authority. Clare
will escape partnership liability that may arise under section 17 and 24(7) of
the PA 1890.

            There are three ways in which an agent (or partner) can
have this authority. First is actual authority. This is a question of fact in
each case. An agent may bind her principal to any action which she is expressly
authorized by her principle to do so. Section 6 of the PA 1890 says actual
authority may be granted by act or instrument or any other manner where it
relates to the business of the firm. In Scott
v Godfrey13,
the defendant employed a broker to purchase for him 225 shares on the Stock
Exchange. He was held to have actual authority as it was expressed to him to
buy they shares. Preeti will argue that Sarah has no actual authority as she
did not permit Sarah to act on her behalf when ordering the hairdryers. Sarah
knew that Preeti only wanted to spend £1000 therefore she exceeded actual
authority.

            Second is when they have no actual authority it is
implied or usual authority. This arises from the status of the particular type
of agent involved. It is a question of law to be determined in respect of each
type of agent. Section 5 of the PA 1890 states where there is no actual
authority, contracts for the purpose of the business carried out in the usual
way, a third party without knowledge can make all the partners liable. Lord
Justice Chadwick analysed this section in Bank
of Scotland v Butcher14
saying that if the act was actually done for the purpose of the business that
in itself would be sufficient. This means if an agent does an act which the
third party would consider as a normal thing for that type of agent to do, then
the principal will be bound by it. Lord Denning stated “It is implied when it
is inferred from the conduct of the parties and the circumstances of the case”15. It could be argued that
Sarah has implied actual authority as both Sarah and Preeti looked at the
equipment then Preeti went away on holiday so it was left to Sarah to place an
order. Although Preeti would say that it was left up to Sarah to pay only £1000
for the hairdryers.

Third
is apparent authority or ostensible, this is also largely a question of fact,
as did Preeti by words or conduct represent that Sarah had the authority to
enter into the transaction? If this is relied on the third party must have no
reason to doubt the lack of authority that Sarah has. Apparent authority arises
where the principle has held out the agent to do a particular thing so that the
third party relies on the representation. Cases were apparent authority is most
common are when the partner has actual authority but exceeds its extent. In Freeman & Lockyer (a firm) v Buckhurst
Park Properties Ltd16, the directors of the company allowed one director to act as if he
had been pointed managing director of the company. They later refuses to pay
their architects, arguing that he was not a managing director and had no power
to make contracts on the company’s behalf. The Court of Appeal held that they
had given the impression than he had the power to bind the company and so the
company was liable on the contract to the architects who relied on this
representation making the contract. Since Sarah and Preeti both go to look at
the equipment, it would be reasonable for outsiders to believe that Sarah was
acting on behalf of the other partner when she placed the order. Therefore all
partners will be bound to pay the debts under section 5 of the PA 1890 which gives
partners some apparent authority.

To
conclude, if a partnership exists between Sarah and Preeti, it will depend upon
a judges view on evidence of the business whether there was actual authority,
implied authority or apparent authority. It would be reasonable to assume that
there was no actual authority. Therefore the suppliers can only claim implied
or apparent authority where Preeti had not agreed to the purchases. Thus the suppliers
must provide evidence that they knew nothing of this disagreement in the
business and examples of evidence that authority existed may be notes or
messages between the partners to purchase such items.

1
Partnership Act (PA) 1890, s1

2 Pooley v Driver (1876) 5ChD 458

3 Adam v Newbigging 1888 13 AC 308

4 2003
EWHC 3093 (Ch)

5 PA
1890, s45

6 Strathearn Gordon Associates v Customs and
Excise Commissioners 1985 V.A.T.T.R 79

7
2000 1 WLR 2123; 2001 1 All ER 20

8 PA
1890, s14

9
2006 EWCA Civ 613, 2006 1 WLR 2562 (Court of Appeal)

10
PA 1890, s17

11
PA 1890, s9

12
(1870) LR 5 Ch App 725, CA

13
1901 2 QB 726

14
2003 AC 366, at 113, HL

15 Hely-Hutchinson v Brayhead Ltd 1968 1
QB 549

16
1964 2 QB 480