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The first issue is whether Bob has authority to bind Keith and Greg in relation to his transaction regarding the land and the painting. The second issue is whether Bob has breached the fiduciary duty towards the firm
Laws: Section 8, Section 12, Section 31, Section 32 and Section 27.1 of Partnership Act 1891 (Qld).
Case laws: Birtchnell v Equity Trustee Ltd, Kilpatrick v Mackay, Lunghi v Sinclair, Russel v Clarke & others, Molinas v Smith, Polkinghorne v Holland, Goldberg v Jenkins, Construction Engineering Pty Ltd v Hexyl Pty Ltd and Kendall v Hamilton.
Regarding the first issue, in order to bind Keith and Greg, Bob must either have: actual authority (expressly stated), implied (act on behalf of the firm) and apparent authority (act within scope of business and usual manner of business).
For actual authority, the act of extending the offer to buy the land must have been done in usual course of business and it must have done with an actual authority to that effect in order that the act will bind Keith and Greg. In the current case, all three partners agreed that decisions regarding all major expenditure must be through their joint agreement. The value of the land being land for $200,000 and the payment by Bob to the real estate agent of 20% of the cost indicate the transaction is a major expenditure. The contract Bob entered was in usual course of business. However, Bob took independent decision without agreement from Keith and Greg. Hence, Bob did not have actual authority to bind Keith and Greg.
Alternative argument could be that Bob had implied authority to enter into the transaction. It could be argued that the contract to purchase the land was entered on behalf of the firm and it would bind the other partners (Molinas v Smith). However, the partnership agreement states otherwise that the three partners must jointly decide on all major expenditures. Hence, Bob did not have implied authority and cannot bind the other partners. S8 PA provides that a partner has apparent authority if he acted as an agent of the firm. As per Polkinghorne v Holland, “transaction involved must be within the scope of the partnership business” (“Slides”) 11, s8.i. PA. In this case, the act of Bob of entering into the contract was to expand the business of the firm and hence was within the scope of the partnership. 20% cost given to the real estate was from the firm’s account, Bob’s action was in the usual manner of business, as is required under s8.ii. PA to have implied authority (Goldberg v Jenkins). Further, Bob and the real estate agent discussed about the business prospect regarding the land. This in fact indicates that the agent knew about Bob as partner of the firm (s8.iv. PA). Also, the fact of the case shows that agent was unaware of lack of authority of Bob (s8iii. PA) (Construction Engineering Pty Ltd v Hexyl Pty Ltd). Since these four requirements were present, Bob did have the apparent authority to enter the contract. S8 PA will bind the partnership. Further, s12 PA holds every partner jointly liable for all debts and obligations of the firm (Kendall v Hamilton). Therefore, the three partners are liable to pay for the purchase of the land. In regard to the purchase of the painting, it could be shown that the transaction was not usual to the business concern. Any reasonable person would have suspected that there was something wrong when Bob bough the painting made by the well-known Australian artist priced $30,000 to be displayed at the entryway to the auto parts business. This purchase was not usual in the context of business of the firm (s8.11 PA, Goldberg v Jenkins) and hence the firm cannot be held liable.
Regarding the first issue, PA provides that all the partners are in fiduciary relationship towards the firm and its partners. As per s31, Bob must have disclosed to Keith and Greg true accounts and full information concerning things that affected the partnership. Bob breached this duty when he did not disclose to Keith and Greg about the painting he purchased. He also breached his fiduciary duty when he did not inform them about the land purchase for two months since purchase.
As per s32, “partners must account to the firm for any benefit they obtain without the consent of the other partners from” (“Slide”) 31. They must account for any use of the firm’s property, name or its business connections (Birtchnell v Equity Trustee Ltd). They must account for any profits made accordingly. In this case, Bob breach this duty when he did not account for the voucher he kept it for himself and he made profit out of the painting, which he bought using the firm’s name. In such scenario, the partners must share the profits equally in capital its (Kilpatrick v Mackay), as per s27.1.a even if there is no express agreement to that effect. In this case, Bob acted with apparent authority to purchase the land, the firm will be liable. Since the purchase of the painting was an unusual purchase, only Bob will be liable. Since, Bob breached his fiduciary duties, Keith and Greg can recover the voucher amount and the profit made by Bob. Since they have trust issue with Bob, they can either get an injunction or apply for firm’s dissolution.
On the balance of probabilities, the Supreme Court, Queensland will have jurisdictions to hear claims arising out of this partnership. Keith and Greg can claim for account of profits, regarding the voucher amount and the secret profits made out of the painting (Lunghi v Sinclair). Since the agreement does not provide for expulsion (Russel v Clarke & others), they can instead apply for injunction to stop Bob from breaching his fiduciary duties. Since the agreement does not provide for dissolution, the last resort is to apply to court to dissolve the form on the ground of Bob’s misconduct.
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