Business Law Environment - Assignment Example

The Business Law Environment Q1: It is apparent that Andrew and Ivor have entered into an implied form of partnership, the term ‘partnership’ being defined as a “relations which subsists between persons carrying on a business in common with a view of profit” considering that their business enterprise is not registered under the Companies Act or any other statute nor formed in accordance with any other law. 1 The partnership agreement between Andrew and Ivor, which is not reduced in writing, should be characterised as a “complicated mixture of the elements of contract, agency and equity” pursuant to the general language of the Partnership Act of 1890. Thus, both Andrew and Ivor are principals with respect to third parties, agents with respect to each other, and have equal rights and duties owing from being part of a fiduciary relationship. 2 The inherent fiduciary nature of partnership entails that good faith characterise all the actions of both Andrew and Ivor relative to Hi-Tek Kitchenware transactions. This is because in a fiduciary relationship a partner is entrusted with the obligation to act for the benefit of the other, implying that Andrew must act for the benefit of Ivor and Ivor, on the hand, must act only, in transactions related to the firm, with the benefit of Andrew in mind. Thus under ss 28 to 30 of PA 1890, the duties and obligations of partners all embrace this element. In the duty of disclosure, under s 28 of the said Act, obligates a partner to reveal all and every transaction that he entered into in behalf of the other partners. 3 Both Andrew and Ivor therefore, are required under this provision of the Act to disclose to each other all transactions and negotiations they entered into in their capacity as agent of each other. In the landmark case, for example, of Law v. Law 4 a partner offered to purchase another partner’s share of the firm to which the latter accepted. He found out belatedly however, after the sale, that the partner to whom he sold his share had failed to disclose certain assets of the firm. When the case was brought to court, the latter held that the duty to disclose is an obligation that each partner must carry out although in this case, the sale was not annulled because it turned out that the selling partner had agreed to a sale without prior disclosure. 5 Another duty of a partner to each other is the duty to account which comes under s 29 of PA 1890. Under the said section, Andrew and Ivor are duty-bound to account to each other all profits or benefits of any kind they gained from all transactions in the name of the firm or the use of the firm property, including any information acquired as a consequence of the partnership. The nuances of this rule is exemplified in the case of Bentley v Craven 6 in which one of the partners purchased sugar in his own capacity and resold it to the partnership at a price above the original. He did not however, disclose to the firm that the sugar was his. The court held that as a consequence of the non-disclosure, the partnership has a right to get back the profit that the selling partner obtained from the said transaction. 7 Another duty enshrined under PA 1890 is the obligation not to compete with the partnership business. Under s 30 of the PA 1890, a partner is duty-bound from engaging in a competition with the partnership business and violation of this duty likewise entitles the partnership to recover the profits gained by the erring partner. This provision was made to apply in the case of Glassington v Thwaites 8 where one of the partners published an evening paper when his firm was engaged in the publication of a morning paper. It was held in this case that the partnership has a right to recover the profits made by the partner from publishing his own paper. In all these cases however, recovery by the partnership from the partner can be eliminated if the partner has made a prior and full disclosure to the partnership and the latter has given him its blessing. 9 Q2: There are four major classifications of business organisations in the United Kingdom, namely: sole traders; partnerships; private limited companies, and; public limited companies. There are however less common types of business organisations like the franchises and cooperatives. 10 The Hi-Tek Kitchenware firm of Andrew and Ivor, aside from being a partnership, can evolve to form either of the two kinds of limited companies. Sole traders are as the term implies is a business owned by a lone individual although it does not preclude such owner to maintain a staff to run the business. The disadvantage of this type is that the owner does not only take all the risks of the business but his liability is unlimited which implies that even his personal property can be made to answer for all obligations of the business. If the business profits however, then he rakes in all that profit after expenses and taxes, in addition to an easy business set up sans paperwork and formal procedures. 11 It is apparent however, that Andrew and Ivor cannot set up their business in this manner because of the number requirement. In addition to the points discussed earlier about partnership, this type of business demands a ‘joint and several’ type of liability from the partners which means that a third party has the option to run after any of the partners for any claim against the partnership firm and the partner against whom the court ordered to pay a third party in the name of the partnership may then demand that the other partners reimburse him for their shares in the liability.12 In addition, partners share the profits of the business equally unless there is a contrary arrangement. In the case of Andrew and Ivor, it would be ideal for them to adopt a deed or an Articles of Partnership since their contribution to the partnership were not of the same kind, Ivor having contributed in cash and Andrew in kind. In addition, a written agreement will prevent confusion and arguments later on although a written agreement is not a requirement to this type of business organisation. 13 Normally, partners have unlimited liability for the firm’s debts which means that each partner is liable even beyond his contribution to the partnership unless the partners intentionally create the rare form of limited partnership. A limited partnership however requires that one of the partners at least has unlimited liability. 14 The partnership is suitable for Andrew and Ivor except that the unlimited nature of its liability will involve all of their properties beyond their contributions. The formation of Limited companies is quite intricate as opposed to both sole traders and partnerships because it entails following a set of procedure which includes the drawing up certain documents like the Memorandum of Agreement which sets up the by-laws and the structure of the company and the Articles of Association which lays down its operational processes. 15 Historically, there are three ways by which a business organisation may be incorporated in the UK: by Royal Charter which was the incorporation used in East India Company and the Hudson Trading Company and today, universities and the BBC are the remnants of this type; by an Act of Parliament as was used for railways and electric companies, and; since 1844, the Companies Act. The law has since been amended into the Companies Act of 2006 and today, many more other laws are in place for the incorporation of various type of organisations. 16 The advantage of incorporating is primarily the separate and distinct personality of the body corporate which makes its stockholders liable only to the extent of their contribution. 17 In this respect, it would be advisable for Ivor and Andrew to incorporate as a private limited company, especially if they intend to expand it and obtain financing from outside sources. Going public necessarily obligates them to sell shares to the public which is not suited to their fledgling business. Q3: (a) As partners, Andrew and Ivor act as agents of each other under the fiduciary nature of partnership. However, the law requires that certain duties, among which are the duty to disclose and the duty to account, be practised by the partners with regard to each other. In the present case, Ivor made a decision to store the Sanifood machines without consulting Andrew. This decision however, was for the good of the business because the items needs to be kept safe immediately and, in the absence of the vacationing Andrew, it does not operate as a loss to the partnership. Ivor, after all, is an agent of the partnership in the same way that Andrew is and as such they both must act for the benefit of each other. In this respect, the contract entered into by Ivor with the storage company is therefore valid. On the other hand, Andrew’s decision to sell the machines at a lower price than that agreed to between him and Ivor operates as a loss to the partnership. As there was no prior consultation with Ivor, the contract entered into by Andrew violates his duties under the PA Act 1890. S 24(8) of the said law requires that the terms of the agreements of the parties cannot be altered unless there is unanimity by all parties to the partnership regarding the change 18 The implication of this is that although Ivor is bound by the acts of his agent Andrew, which means therefore he cannot operate to renege on the contract against a third party like Goliath SA, he cannot be made to bear the loss that the partnership will suffer as a result of the down pricing. Recourse can be made therefore against Andrew’s own shares of the profit. (b) If the partnership has since evolved into a limited company, the firm having gone through the process of incorporation under the present UK laws, there will be a different answer to the same problem posed by Q3 owing to the fact that the nature and characteristics of a partnership and an incorporated private limited company are different. Whilst the partners in a partnership automatically act as principals and agents with respect to third parties and of the other partners, respectively, 19 this is not so in limited companies. A limited company, which is an artificial personality distinct from its shareholders, is a structured entity in which shareholders do not necessarily have roles and functions in its operations unless specifically granted authority. Assuming however, that Andrew has specific authority to act on behalf of the company, selling the price of the machines below that agreed upon by him and Ivor constitutes an ultra vires act and therefore does not bind the company for the lack of authority. Also, “at common law, (but subject to the statutory provisions and the general agency principles), a contract which is entered into by the company’s officers without authority (for example because it exceeds restrictions in the articles, or because the directors are acting in breach of their fiduciary duties to the company) may be set aside by the company in general meeting by ordinary resolution. 20 Andrew’s act therefore is not binding to the company for lack of authority whilst Ivor’s act was valid because it was not in contravention to the fiduciary duty he owed to the company. References: Bentley v Craven [1853] 18 Beav. 74 204. Carysforth, C & M Neild & Edexcel Foundation 2000, Intermediate Business, Edition: 2, illustrated, Heinemann. Deards, R 1999, Practice Notes on Partnership Law, Edition: illustrated, Routledge. Glassington v Thwaites [1823] (1823) 1 Sim & St 124. Kelly, D & A Holmes & R Hayward 2005, Business Law, Edition: 5, revised, Routledge Cavendish. Law v. Law [1905] 1 Ch 40. Mäntysaari, P 2005, Comparative corporate governance: shareholders as a rule-maker, Springer. Marsh, S B & J. Soulsby 2002, Business Law, Edition: 8, illustrated, revised, Nelson Thornes. Partnership Act 1890. opsi. http://www.opsi.gov.uk/RevisedStatutes/Acts/ukpga/1890/cukpga_18900039_en_1#pb1-l1g1 Ramage, S 2004, Legal and Regulatory Framework: For Business in the UK, iUniverse. Read More