Problem-Solving Questions in Business Partnership - Essay Example

?Problem solving questions Business entity question Issues: What steps should Jody take to enter into partnership with Mike and Sarah and what are the risks involved in investing her inherited money in a hair dressing salon along with Mike and Sarah as other partners without capital and without a written agreement? Law and Cases: Partnership Act 1963 and Common law would apply to decide on issues arising in a partnership. Section 6 of the act lays down that a partnership should be for a business to be carried on for profit for the common benefit of all the partners. It includes also an incorporated limited partnership. Once a partnership is formed, every partner becomes the agent of the firm and other partners in relation to the business of the firm. Thus, every act of partner for the purpose of business except in the case of incorporated limited partnership shall bind the firm and other partners provided the partner acts within his authority to act for the firm in specific cases and the person whom the partner is dealing with believes him to be the partner having authority. In other words, if the person dealt with by the partner knows that the partner has no authority, his acts cannot bind the firm nor other partners. The same holds good in respect of a general partner vis-a-vis the firm and other general partners. Section 13 (1) of the Act lays down that all partners except in the case of an incorporated limited partnership are liable jointly and severally for the liabilities of the firm that have risen whilst being partners. S 13 (2) if the partner who is an individual dies, his/her estate is severally liable for the liabilities of the firm after satisfaction of his/her separate debts. Same holds good in case of incorporated limited partnership for a deceased general partner. The general partner of an incorporated limited partnership is liable only in respect of unsatisfied liabilities of the firm or more as per the partnership agreement. Partnership agreement is not required to be in writing under common law. But in the case of an incorporated limited partnership, the agreement must be in writing which takes care of interests of the partners and their rights and duties (PartnershipAct1963, 2012). Even otherwise, the partnership agreement must be in writing if the business is to be carried on for more than one year as required under the Statute of Frauds (Latimer, 2012). As the partnership business is in common, the partners should disclose material facts that affect their partnership failing which it would amount to misrepresentation on the part of those who fail to do so. Further, a retiring partner can by a condition of restraint of trade be prohibited to start a competing business within the locality for a pre-determined period. Further, a partnership contract cannot be assigned (Gilles, 1988). Application In view of the above important provisions governing partnership business, Jody whose capital will be at stake must have the partnership agreement reduced to writing. And Jody must be entitled to a proportionately higher share of profit and reserve to herself the right to take important decisions in day to day management. This does not mean the other partners are not liable to loss that may occur due to Jody’s decision making. Conclusion Jody can enter into partnership with Mike and Sarah keeping in view of the limited capital or no capital Mike and Sara may bring in and also have an agreement in restraint of trade on the retiring partners including Jody herself. Consequences The proposal to enter into partnership agreement among Jody, Mike and Sarah will be viable subject to the above conditions therein. 2. Tort- negligent misstatement Issues: Whether Amy can sue Betty for her wrong advice tendered to Amy as a result of negligent misstatement? Law and cases: In order to prove negligence on the part of defendant, claimant should satisfy three conditions. That defendant had a duty of care to the claimant; this was breached by the defendant; that the damage caused by the breach of duty was reasonably foreseeable. Until the decision in Donoghue v Stevenson (1932), the duty of care principle had been restricted to a few categories such as duty among road-users and duty by premises occupiers to visitors. This case established a neighborhood principle by which is meant persons likely to be closely and directly affected by the negligent act of the defendant. The scope of duty of care principle was expanded to take into account any policy reasons against imposing a duty. Policy reasons include which of the parties could bear the loss and any of them has been insured. Whether it would open floodgates of claims. Whether imposition of duty of care will make the party more careful. And whether it is moral to impose a duty. As such a three stage-stage test introduced in Caparo v Dickman (1990) was; Whether one could reasonably foresee harm or loss capable of being caused? Was there a close relationship between the parties with sufficient proximity to justify imposition of duty of care? And whether it is fair and equitable for law to impose a duty on the defendant in all circumstances? This case involved reliance placed by Caparo on the accounts of Fidelity plc audited by the defendants Dickman in deciding to invest on their shares for an ultimate takeover since the accounts approved by Dickman showed a profit of ? 1.3 m instead of an actual loss of ? 465,000. The court held auditors Dickman not liable as they owed a duty to shareholders and not to public at large In the case of Hedley Byrne & Co ltd v Heller (1964), it was held that defendant had a duty of care not make to negligent misstatement that underscored a proximate relationship between the parties and awareness on the part of the defendant that his statement would be relied upon by the plaintiff in taking a decision. This case involved reliance placed by the claimant on the financial reference provided by the defendant. However, in view of the disclaimer by the defendant in his advice, he was absolved of any liability. Sometimes courts ignore disclaimers and hold defendants liable in view of Unfair Contract Terms. In Chaudhry v Prabhaker (1994), the claimant relied on his defendant-friend’s advice to buy a car which turned out to be not roadworthy. The court held defendant liable as he owed duty of care. Application: Betty who is an accountant responds to Amy’s request to tender advice on investment on shares of AA Ltd that it will be a good investment. But it turns out that Betty has misread the financial statements of the company and given a wrong advice. There is close proximity of relationship between Amy and Betty and Betty could reasonably foresee that her advice would make Amy act and outcome of the investment would rest on her advice. There was no disclaimer by Betty and it could not be assumed as a social obligation since Amy relied on Betty’s expertise and fact that Betty charged a fee or not is immaterial if the decision in Chaudhry v Prabhaker (1994) is to be relied upon. Conclusion: Betty has therefore made a negligent misstatement and should be held liable to Amy for the wrongful economic loss. Consequences: Amy can sue Betty for the loss incurred by her. 3. Tort- negligence Issue: Both Mark and Sarah are injured. Whether Mark or Sarah can claim on tort of negligence from the other? Law and Cases: Duty of care, breach of that duty and causation i.e loss or injury are the three elements of negligence. The claimant has to establish that he/she was owed a duty of care by the defendant. Traditional categories of claimant/defendant are such as patient/ physician, surgeon, manufacturer/ consumer and driver/passenger, driver and other road users including pedestrians. Etc. Cases involved are Donoghue v Stevenson and Grant v Australian Knitting Mills for manufacturer/consumer categories. Modern law of tort prescribes presence of three factors i.e foresight, proximity and justice or fairness. By foresight, it is meant that the defendant must have foreseen possible injury to the claimant through his act or omission. In Topp v London Country Bus (South West) Ltd 1993, it was held that the defendant was not liable since he could not have foreseen that a boy would steal the bus left by the employee of bus company and cause accident which resulted in death of a woman. On the other hand, in Margereson v JW Roberts Ltd (1996), the defendant who was the owner of asbestos factory was held liable since he could have foreseen that people in the neighborhood could contract pulmonary disease. As such, he had a duty of care to the neighborhood. By proximity, it is meant that there must be proximity of relationship between the claimant and defendant in order for the claimant to expect duty care from the defendant. It has been explained in Yuen Kun Yeu v Attorney general of Hong Kong (1988) that proximity is both foreseeability as well as closeness of relationship known as neighborhood principle. By justice and fairness, it is meant that law should impose a duty through consideration of fairness, just and reasonableness (Kulshoom, 2012). Defenses available to a defendant can be contributory negligence, comparative negligence and assumption of risk apart from absence of duty of care, proximity and fair and just principle. Contributory negligence shifts the burden of loss from the defendant to claimant himself. It is because negligence of the plaintiff is the proximate cause of the injury. This cannot be completely accepted because several events would cause injuries each of which will have its proximate cause. (Edwards, Edwards, & Wells, 2011). Application: Sarah caused her own accident because of her contributory negligence in driving at the centre of the road hitting the car of Mark who was driving within speed limits and in straight line though drunk. Sarah would have hit his car even if Mark had not been drunk. Applying the tests of negligence such as duty of care, proximity and fair and just principle, Sarah failed in her duty of care to a co-road user with whom there was in proximate relationship. On the other hand, Mark did not fail in his duty of care although drunk while driving. He was drunk while driving which is illegal and he could have averted the accident had he not been drunk though chances for which had been remote. Had he not been drunk, he could have minimized the injury to both to himself and Sarah. Conclusion: In view of the contributory negligence principle, both Mark and Sarah cannot claim damages from the other. While Sarah has no defense at all, Mark can hope to have his claim considerably reduced because of his drunken driving. Consequences: Mark can sue Sarah for a proportionate claim while Sara cannot make any claim at all. 4. Contract Law- exclusion clauses. Issue: Whether Konrad can sue the ferry company for the loss of his car ? Law and Cases: Civil Liability Acts restrict liability for harm caused by recreational activities where there is a warning of risk. There is no duty of care in such cases. Exclusion clauses are permitted under the Acts However, exclusion clause cannot exclude negligence unless it is specifically stated and is permitted by consumer laws. If there has been a previous dealing, it is a sufficient notice for the presence of an exclusion clause. In Balmain New Ferry Co ltd v Robertson (1906) HCA 83, the passenger missed the ferry and he refused to pay one penny that should be paid while leaving as per the known condition that it should be paid whether he had travelled or not. As he was the regular passenger, he was considered to be aware of the condition that a passenger should pay one penny both at the time of entry and exit regardless of his having travelled or otherwise. In White v John Warwick & Co ltd (1953) 1 WLR 1285, the defendant bike hiring company had inserted a clause in the contract with Claimant who hired the bike stating that owners were not responsible for any personal injuries to the riders who hired the bikes. White who hired the bike fell from bike because of tilting seat and was injured as a result. Defendant company’s exclusion clause was not effective since it did specifically exclude liability for negligence. Consumer law now limits the operation of exclusion clauses. However recreational service providers can restrict their liability under state law (Latimer, 2012). Application: Applying the above principles, the ferry company has given sufficient notice of risk involved both on the reverse of the ticket as well as on the ferry itself which Konrad could not have missed. Besides, he was a regular passenger and has used the ferry before and must be aware of notice reading “ All vehicle and passenger users use this ferry at their own risk” The decision in Balmain New Ferry Co ltd v Robertson (1906) HCA 83 will apply as far as the condition of previous dealing is concerned. Since the ferry sank as a result of negligent navigation of the captain, it should be examined whether the notice of warning included negligence. Law permits exclusion of negligence if sufficiently given notice of unless specifically excluded by consumer legislation as unconscionable. In the instant case the wordings are “All vehicle and passenger users use this ferry at their own risk”. This should be taken to included risk arising out of negligence. Conclusion: In view of the above position, Konrad cannot proceed against the ferry company for the loss of his car because of his previous dealing and clear notice of risk displayed on the ferry as well as on the reverse of the ticket. Consequences: Konrad has to bear his own loss unless he has insured the car and he cannot sue the ferry company. 5. Contract law- constructing the contract Issue: Can farmer Joe sue farmer Bob for breach of contract since the calf he purchased based on the statement of Bob about the calf’s condition of good health later turned to be untrue since the calf died of tuberculosis after a week of purchase? Law and cases: In Oscar Chess Ltd v Williams [1957] WLR 370, a second hand car was sold by a car dealer stating that car was a 1948 model. Both the dealer and the purchaser had believed it to be true. After six months, purchaser discovered that the car was a1939 model and worth lesser than what he paid. Purchaser therefore claimed damages for breach of contract as breach of warranty. The purchaser could not succeed for the reason that the statement of the car dealer about the car’s age was not a term of the contract but an innocent misrepresentation. In such cases, there no damages could be claimed. At the time of purchase, the car dealer did not make any warranty about the car’s age. His statement about it was based on the reasonable grounds such as car’s registration papers and he honestly believed them to be true. However, in Bentley (Dick) Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623, the car dealer, informed that Bentley had traveled 20,000 miles on a replaced engine and a gear box. It was found later that the car had in fact had traveled more than 100, 000 miles. The purchaser successfully claimed damages for breach of warranty (Latimer, 2012). Application: Farmer Joe buys the calf at an auction where there is an express condition that “no warranty is given to the quality of any animal”. In spite of this, farmer Bob informs Joe before buying that the calf is in good health as certified by a Veterinary doctor. Joe who was examining the calf stopped examining any further and purchased the calf believing the words of Bob. Here, the Bob makes an innocent misrepresentation based on the Vet’s opinion. It might be true or untrue. It might have been to induce Joe to purchase the calf. However, the specific notice that no warranty for quality of any animal prevails over any such misrepresentation. The principle of Caveat emptor “let the buyer beware” would apply. What happened in Joe’s case can also be termed as “mere representation” as part of pre-contractual negotiation and the condition of no warranty would be deemed to come into effect once the sale is made. In Heilbut Symons v Buckleton [1913] AC 30, it was stated that a person could not be held liable for innocent misrepresentation (Goldring, 1998). Conclusion: In view of the absence of warranty at an auction and ruling in respect of innocent misrepresentation, no action could be brought against the seller for breach of warranty. Consequences: Joe cannot successfully sue Bob for breach of contract as there was no warranty in spite of a mere representation as part of pre-contractual negotiations. 6. Contract Law – breach of contract and remedies. Whether Jim could claim from Des $ 16,000 being the four months anticipated rent lost due to four months delay in performance on the part of Des? Law and Cases: In common law, remedies are available to an injured party in the form of damages for breach of contract. The damages are ordinary, nominal or exemplary. While the ordinary damage is the compensation of actual loss, nominal damages are awarded where there is no actual loss. It will be a small amount to uphold the infringement of the injured party’s legal rights. Exemplary damages represent not only actual loss but also punishment. Before considering damages for breach of contract, it should be examined whether there has been a breach, and an actual loss has been incurred. And whether injury or loss is farfetched or remote. In Victoria Laundry v Newman Industries [1949], it was held that loss suffered was direct result of the breach of contract. If the loss or damage does not take place, it should be established that the breaching party has the known the needs of the innocent party as held in Hadley v Baxendale [1854] and Commonwealth of Australia v Amann Aviation Pty Ltd [1991]. If damages have been agreed to be payable, it should be ascertained what is amount payable in the event of breach. The object of damages is to put back the innocent or injured party in the condition in which the breach has not occurred at all. In order to recover damages, the injured party must show loss failing which the injured party can only recover nominal damages as held in Charter v Sullivan [1957]. In the absence of actual loss, damages are still recoverable for the anxiety etc suffered by the injured by party as held in Jarvis v Swan Tours [1972] and Baltic Shipping Co ltd [1993]. It would also be examined whether the injured party took reasonable steps to mitigate loss failing which damages could be reduced (Gibson & Fraser, 2006). Application: Jim has entered into contract with Des with a condition to complete the contract by 30th September. Des was never informed by Jim the purpose for which construction of carport was intended. Jim has not informed him that he would lose $ 4,000 per month and that Des would be liable to pay for breach or delay in performance. As such, Jim is not justified in claiming a damage of $ 16,000 for the delay in performance. Even if he informed Des of it, unless loss is actual, he could not claim the damage as calculated by him in the absence of contracts for hiring vintage cars from the 1st of October. By application of above said decisions, Jim is not justified in claiming a damage of $ 16,000. Conclusion. Assuming that Jim is able to substantiate his claim of loss , he can still not claim in the absence of specific condition in the contract to that effect and in view of his failure to inform Des of his intended business and likely income. At the most, he will be entitled for nominal damages in view of the breach of condition to hand over the completed construction by 30th September. Consequences: Jim cannot successfully sue Des for a damage of $ 16,000. References Edwards, L. L., Edwards, J. S., & Wells, K. P. (2011). Tort Law. Newyork: Cengage Learning . Gibson, & Fraser. (2006). Business Law. Chapter 18 Remedies for Brecah of Contract (2 ed.). Queensland: Pearson. Gilles, P. (1988). Concise Contract Law. Federation Press: NSW. Goldring, J. (1998). Consumer Protection Law . NSW : Federation Press. Kulshoom. (2012, April 29). Negligence duty of care . Retrieved September 22, 2012, from Slideshare: http://www.slideshare.net/Kulshoom/negligence-duty-of-care Latimer, P. (2012). Australian Business Law. NSW: CCH Australia Limited. PartnershipAct1963. (2012, May 28). Retrieved Septmeber 21, 2012, from www.legislation.act.gov.au Read More