PARTNERSHIP CASE EXTRACTS TAKEN FROM

Graw, S., (2001) An Outline of the Law of Partnership, 2nd Ed., Lawbook Co., Pyrmont, NSW.

Cox v Coulson [1916] 2 KB 177 (Graw 24; 2001)

Facts: Coulson leased and managed a theatre in which a touring company under the management of one C Watson Mill was performing a play. The financial arrangements were that Mill received 40 per cent of the gross box office receipts with the remaining 60 per cent going to Couslon. During a particular performance Cox, a member of the audience, was injured when a weapon being used as a prop (and which should not have been loaded) accidently discharged. Cox sued and the court had to decide whether Coulson, who had not been directly concerned with the specifics of the performance, could be made liable. Held: Coulson could be liable but only as an inviter potentially in breach of his duty to invitees entering his theatre. He was not directly or vicariously responsible for the negligence of the actor either as his employer or as Mills partner. As Swinfen Eady LJ explained at 181: Although the gross takings were divided between them, there was not any partnership; each had to discharge his own separate liabilities in respect of the venture. The travelling expenses, the remuneration of the actors, the cost of the appliances had to be borne entirely by Mill. The theatre rent and outgoings, the cost of the lighting, and the cost of playbills were wholly to be borne by the defendant. One of them may have made a profit out of the venture, and the other might have made a loss. Neither of them had authority to bind the other in any way; there was no agency between them. The sharing of gross returns does not of itself create a partnership.

Cox v Hickman (1860) 8 HL Cas 268; 11 ER 431 (Graw 28; 2001)

Facts: Benjamin Smith and his son Josiah carried on business under the partnership name B Smith and Son. The business fell into financial difficulty and it was decided that the Smiths would assign their business to trustees, who would carry it on and pay its net income to the creditors. That net income was deemed to remain the Smiths property (though it was to be applied to pay their debts) and once all the debts were paid the assets of the business were to be returned to them. During the period of trusteeship, Hickman, a supplier, drew three bills of exchange on the business and the trustees accepted them, purportedly on behalf of the firm (thus making the firm liable to pay them when they matured). The bills were dishonoured when they became due. Hickman sued Cox and Wheatcroft, arguing that they were members of a partnership (consisting of the firms creditors) that was running the business and that they were, therefore, liable on the bills.

Held: The mere fact that Cox and Wheatcroft, as creditors, had actually shared in the profits of the business did not make them partners in that business or liable for its debts. They had not been carrying on the business in common in the required sense.

Stekel v Ellice [1973] 1 WLR 191; [1973] 1 All ER 465 (Graw 42; 2001)
Facts: The parties were chartered accountants, Ellice having practised for some considerable time in partnership with one Jennison. When Jennison died, Ellice took Stekel on as an employee on the clear understanding that, if things worked out, Stekel would be made a partner. Things did work out but Ellice delayed giving Stekel the promised partnership because there was some doubt as to how much the firm would have to pay Jennisons estate. As a compromise it was agreed that Stekel would become a salaried partner until the firms liability to the estate could be ascertained. A written agreement to that effect was signed in 1968 but it also stipulated that the salaried partnership was only to last until 5 April 1969 and that the parties would enter into a deed or agreement on or before that date making Stekel a full partner. The agreement went on to recite that Stekel was to receive a salary of 2000 per annum, that the capital of the firm was to be provided by and shall solely belong to Ellice, that the relationship could be terminated by notice and that, upon any such termination, Ellice was to be entitled to all the capital and clients of the firm. After this agreement had been signed the parties continued the practice as before except that, thereafter, Stekel had his name on the firms letterhead as a partner and, within the firm, he acted as if he were a partner. No further steps were actually taken to make him a full partner however and, in August 1970, Stekel left the firm and brought an action seeking an order that the affairs of the partnership be wound up and that all necessary accounts be taken. Held: In the circumstances, a partnership between Stekel and Ellice had come into existence. Although their agreement for Stekel to receive a salary and for Ellice to have sole ownership of the firms capital was unusual, the other aspects of their 1968 agreement and their actual conduct thereafter were all consistent with the existence of a partnership. That partnership had terminated through mutual agreement in August 1970 but, because under the terms of the 1968 agreement Stekel was to have no interest in the capital or clients of the firm upon termination, he had no entitlement to either a winding-up order or an account. On the question of the legal status of a salaried partner Megarry J commented at 199; at 473: It seems to me impossible to say that as a matter of law a salaried partner is not necessarily a partner in the true sense. He may or may not be a partner, depending on the facts. What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question whether or not there is a partnership depends on what the true relationship is, and not on any mere label attached to that partnership. A relationship that is plainly not a partnership is no more made into a partnership by calling it one than a relationship which is plainly a partnership is prevented from being one by a clause negativing partnership.

Polkinghorne v Holland (1934) 51 CLR 143 (Graw 92; 2001)

Facts: Thomas Holland, his son Harold and Louis Whitington were partners in a legal practice. The plaintiff, Florence Polkinghorne, was one of Thomas Hollands long-time clients but much of her business was attended to by Harold rather than by his father. Most of that business was to do with the investment of Mrs Polkinghornes money which, up to that point, had mainly been put in government securities and in first mortgages over property. The return on those investments was not great and Harold advised her that better returns were available elsewhere. Specifically, he advised her to sell 4000 worth of inscribed stock and to invest the proceeds in SA Trust Investment Co Ltd, a company that Harold had formed, which was run by one of his friends and which Harold knew was a mere shell. He later advised her to sell a further 1000 worth of stock and to lend the proceeds to Secretariat Ltd, a company that he had also formed and which, again, was without any financial substance. Finally, he persuaded her to become a director of Secretariat Ltd and to guarantee its overdraft in exchange for a share in its profits. All of these investments failed and Mrs Polkinghorne lost the 5000 that she had invested and an additional 5475 for which she became liable under her guarantee. Harold had disappeared when these losses became known, so Mrs Polkinghorne sued his father and Whitington alleging that, as Harolds partners, they were liable for her losses. They argued that they were not liable because giving financial advice was not part of the ordinary course of the business of the firm. Held: Harolds partners were liable for the 5000 Mrs Polkinghorne had lost from her investments in the SA Trust Investment Co Ltd and in Secretariat Ltd but they were not liable for the 5475 that she had lost by guaranteeing Secretariat Ltds overdraft. They were liable for the first set of losses because, on both occasions, Mrs Polkinghorne had specifically approached Harold for advice on the financial merits of the proposals before making her investments. The Court accepted (at 158) that solicitors possess no special skill in the valuation of real property, of shares, or of marketable securities *and+ it is not in the course of their professional duty to advise upon such matters. However, the court then went on to note (at 159) that it was within their duty to give, carefully, such advice as they could. Therefore, when Mrs Polkinghorne had asked Harold for advice, he had been obliged to explain to her what might be done if she wished to ascertain whether the company was not insubstantial, whether its business was not speculative or chimerical, whether its promoters were not men without standing, and of informing her what further inquiries might be made into the business and profit-earning capacity of the concern, and of warning her of the danger of blind investment. Here, Harold had not only failed to do what was required of him as Mrs Polkinghornes solicitor, he had actively concealed from her his knowledge of the very real dangers that were involved in entering into any of the suggested investments. For this reason, his acts and omissions in advising her about those investments were acts or omissions in the ordinary course of the business of the firm and his partners were, therefore, liable. The losses on the guarantee, however, were different. The guarantee arrangement had not involved Harold acting in his professional capacity Mrs Polkinghorne had neither sought his advice nor asked him to act for her. What he had done was unconscionable and an abuse of the influence that his position as her solicitor had given him but it had not involved him doing anything in the ordinary course of the business of the firm. Therefore, neither his father nor Whitington were liable for the losses on the guarantee.

Harvey v Harvey (1970) 120 CLR 529 (Graw 111; 2001)

Facts: Harold Harvey owned a pastoral property. When he became too ill to work it, he entered into an agreement with his brother Horace under which Horace and his two sons undertook to work the property in partnership with him. Harold had originally intended to sell the property but Horace convinced him that the proposed arrangement was preferable. It gave Horaces sons some experience running a pastoral property and it also ensured that the land would be available for Harolds son Robin, then aged six, if he wanted to take it over when he got older. Harold was to bring into the proposed business certain stock and implements and the firm of H L Harvey and Sons (Horace) was to contribute labour and skill but no other capital. Harold was to take no active part in the enterprise but profits and expenses were to be divided equally between Harold and his brothers firm. When the partnership was dissolved, a dispute arose about whether the land had become partnership property (and, therefore, whether it had to be sold and the proceeds divided between Harold, Horace and Horaces sons). Held: The land had not become partnership property. The court accepted that Harold had never intended that it would become a partnership asset. In fact, his intention (and his brothers intention) was quite clear the property was to be run in partnership only until Harolds son Robin was old enough to take it over. The partnership arrangement was merely a means of ensuring that the property could be kept in Harolds hands until Robin was old enough to work it himself. Consequently, the land, including all improvements, had not become partnership property. It was, therefore, not divisible among the partners. (However, the final accounts were adjusted because Harold had not paid his fair share of the cost of those improvements while the partnership was on foot).