A, B and C are long time friends from University days. They share common interests especially with respect to making money. A is a computer programmer for a bank, B is a chartered accountant and C a corporate lawyer. While having drinks after work one evening in May, A indicated that he had become disenchanted with the lack of challenge at his work. He is contemplating undertaking a radical change in direction in his career. He stated that he wants to take the plunge and set up a business but hasn’t come across the right opportunity. This entrepreneurial spirit excited B’s and C’s capitalistic notions.
They discussed various business opportunities. At a subsequent meeting in June, A is besotted about an exciting new range of specialist computer products which cater only for accounting and legal firms. A informs B and C that this new range of products was recently released in the United States by a large computer manufacturer, D. It had taken the market by storm.
D had just opened an Australian office in Sydney and A had befriended the Australian manager of D at a computing conference. The manager of D indicated that D was anxious to establish itself quickly in the Australian market. A was delirious. To get the exclusive South Australian distribution rights for these products was the business opportunity of a lifetime. However, he lacked the required finances. B and C’s greed for money soon had the three friends entering the following syndicate agreement:
(i)B and C would each provide $200,000 into the syndicate;
(ii)A would operate the day-to-day running of the business but any expenditure in excess of $20,000 required B and C’s approval;
(iii)A would receive a salary of $80,000 per annum (per year);
(iv)A, B and C agreed to share profits equally but as they were all blind optimists, there was no mention regarding the sharing of losses.
In July, A, B and C entered into a joint venture agreement with D whereby:
(i)A, B and C were granted the sole distribution rights for the products in South Australia for a fee of 20% of the annual net profits of A, B and C’s business;
(ii)A, B and C agreed to comply with any marketing instructions issued by D;
(iii)A, B and C agreed to purchase all their computing products exclusively from D. This was most unusual as all their competitors purchased products from a range of computing companies.
(iv)D had a right to inspect the business venture’s books of accounts and a right to receive quarterly statements.
In December, at a computing trade exhibition, A is overcome by an exciting range of new products being offered by IBN Computers Ltd. He immediately attempted to phone B and C on his mobile phone but was unsuccessful. A, being the impetuous person he was, couldn’t wait and ordered $250,000 of computing products from IBN.
Provide advice with respect to:
(i)the nature of the relationship between A, B and C;
(ii)the nature of the relationship between A, B and C and D;
(iii)The legal consequences of the $250,000 order with IBN. (For this question, assume the relationship of A, B and C is a partnership and their relationship with D is merely a distribution agreement)
Refer to Course Reader 1 – The Law of Business Structures, Semester 1, 2012, Appendix 1 containing Latimer P, Australian Business Law, 31st ed, 2012, Chapter 10, Partnership, CCH Australia Limited, 2011
Birtchnell v. Equity Trustees Executors and Agency Co. Ltd (1929) 30 ALR 273 (For case extract refer to Appendix 3 “Selected Case Extracts” in The Law of Business Structures, Course Reader 1).
(i) Be prepared to discuss the basic facts and finding of the case.
(ii) Dixon J (as he then was) said that the fiduciary doctrines as they applied to partnership were clear and inflexible.
(a) What are the fiduciary doctrines that apply to partners?
(b) What are some examples when the fiduciary doctrines are inflexible?
(c) Why are the fiduciary doctrines so inflexible?
Discuss the advantages and disadvantages of conducting a business with a partnership structure.
Note: Students should remember to compare and contrast the advantages and disadvantages of the four (4) business structures of a sole proprietor, partnership, trust and corporation as the course progresses. Students need to be able to explain why one or more of the structures should be preferred over another in a given fact scenario.