Question 1 Melanie and Carol conduct a beauty salon business. Melanie is responsible for performing the beauty treatments and Carol is solely responsible for providing and packaging the beauty...

Question 1
Melanie and Carol conduct a beauty salon business. Melanie is responsible for
performing the beauty treatments and Carol is solely responsible for providing and
packaging the beauty products for sale. Polly, a friend of both Melanie and Carol's,
agreed to lend them $10,000 to get the business started. Profits are to be shared between
Melanie and Carol equally. Claire purchased a beauty lotion from the business recently.
She complains that the lotion she bought has caused her severe facial burns, leaving her
unable to work for several weeks. Tests have revealed that the lotion contains chemicals
likely to cause harm if applied directly to human skin. Unfortunately, when Carol was
preparing the lotion for bottling she allowed a quantity of co
osive industrial cleanser
to be mixed into the lotion. Claire is seeking $150,000 damages to cover medical
expenses, lost wages and considerable pain and suffering. Carol has no money and
Claire wants to claim against Melanie and Polly. Melanie and Polly claim that the
negligence and
each of contract is solely the responsibility of Carol. Discuss whether
Claire has an action against either Melanie or Polly. (10 marks)
Answer to question No. 1
Issue : Are Melanie, carol and Polly are partners in the business ?
What is the liability of partners to third party ?
Rules :
Definition of Partnership : As per sec 5 of Partnership Act 1891, Partnership is the relation
which subsists between the persons ca
ying on a business in common with a view of profit.
( South Sydeney Distric Rugby League Football club Ltd vs News Ltd.) The basic definition
postulates three necessary criteria:
a) The ca
ying on of a business
) The requirement that the business be ca
ied on in common and
c) The requirement that the business be ca
ied on with a view to profit.
Chapter 2 , Part 1, sec 6 clearly states out the rule in order to decide whether partnership exist
or not. These rules are described as below:
a) Merely joint ownership, or property held in joint tenancy, joint property, common
property or tenancy in common, does not create partnership between the owner and
tenant. In simple words, the tenant and owner share or do not share any profit by the
use of anything held jointly or in common.
) The second rules clearly states that even by sharing of gross return also do not create
partnership. Whether the person sharing such returns have or have not any common
interest in the property from which the returns are derived. Ref : Hitchins vs Hitchins
and another
c) The third rule states the prima facie evidence of existence of partnership is, when a
person receives share of profit from a business, then partnership exist between those
person. However, it is important to note that if such shares vary with the profits of the
usiness or contingent payment then it does not create partnership within the meaning
of this act. This rules states out what does not constitute a partnership :
i) If a person is receiving the debt or other liquidated amount by way of
instalments from the accounting profits of the business , then it does not make
that person partner in the business.
ii) Remuneration to servant or agent of the person engaged in the business by
share of the profits of the business, does not make that servant or agent a
partner in the business.
iii) A deceased person’s spouse /child who is/are receiving share of profits from
the business in which deceased was partner, does not make the spouse or child
partner in the business.
iv) A person who has advanced money as a loan to person who is or will be
engaged in business on a contract to receive interest varying on profit of the
usiness or to receive share of profit from the business , does not make the
lender a partner in the business with person or persons ca
ying such business
or liable as such.
v) A person who receives annuity or a share of profit of business in consideration
of sale of goodwill of business by the person ca
ying on business does not
make such person partner in the business or liable as such.
For the purpose of 1(c) (iv) the contract must be written and signed by or behalf of all the
parties to the contract.
Liability of the firm for wrongs:
Sec 13(1) of the Partnership Act 1891 states that if the firm has incu
ed any loss, injuries
caused to third person who is not the partner of the firm , or penalty caused due to such
injury, as a result of wrongful act of the partner in the ordinary course of business, then firm
is liable to pay such loss, injury or penalty incu
ed due to such injury.
Further sec 15(1) states that every partner in the firm is liable jointly with the partner’s co-
partners and severally for everything for which the firm becomes liable under sec 13 or 14
when he or she is partner of the firm.
In simple words, partner is liable for his/her co partner’s wrongful act and also severally
liable for any loss, injury or penalty for such injury. Ref Dubai Aluminium Company Limited
vs Salaam and Others. In Proceedings Commissioner V Ali Hatem, , one partner in garage ,
who was incharge of hiring the staff, was held to have been guilty for sexual harassment of an
employee of the firm. The court refe
ed to sec 13 of the partnership Act 1908 and held the
view that even though sexual harassment cannot be regarded as ordinary course of firm’s
usiness, but the partner committed this wrongful act , while he was performing the ordinary
course of business i.e. dealing with the staff members in work environment, therefore firm is
liable for his conduct.
Partnership and Agency:
A partnership is usually treated as consensual a
angement which give rise to relations of
agency between the partners. Each partner is regarded as agent of each other and also they are
the principals of each others.
APPLICATION :
In the given situation , Melanie and Carol are partners in the business as per the basic
definition given in section 5 of Partnership act 1891. They share profits equally and they care
ca
ying on business in common with a view to profit. On the basis of this definition we can
establish that a partnership existed between Melanie and Carol. In such case, the firm is liable
jointly severally for all its partners’ acts.
Polly has merely lent the money to Melanie and Carol to start the business. Therefore as per
the statutory rules to definition under sec 6 of the Act, she is not considered as partner of the
usiness or make liable as such. Polly cannot be considered as partner and she is also not
liable, jointly or severally for firm’s act.
As refe
ed to the case of Proceedings Commissioner v Ali Hatem, and sec 13 of Partnership
Act 1908, Melanie is jointly liable for wrongful act of Carol. Carol was responsible for
packaging of beauty products and she has done wrong by adding co
osive industrial cleaner
in lotion which has caused injury to Claire. As carol has done wrong during the ordinary
course of business which was packaging beauty products, the firm is liable for her action and
Mealnie is jointly and severally liable for all the penalties, loss and injury caused due to
wrongful act of Carol as per sec 13 of the Partnership Act 1908.
Conclusion : Though Carol does not have money, Melanie, being another partner in the
usiness, is jointly and severally liable for all the lossess, penalty claimed by Clair ie. 15000
dollars. However, Clair cannot claim anything against Polly because she is not a partner in
the business.
Question 2 Brodie Pty Ltd is the trustee of the Brodie family trust. The trustee operates
a liquor retail store at a building owned by Brodie Pty Ltd as trustee for the family
trust. Recently, the sole director of Brodie Pty Ltd, La
y, ordered $15,000 worth of
wine and spirits for the store from Winits Pty Ltd. This purchase was made even
though the store was seriously in debt and the trust had insufficient cash reserves to
service its existing loans. In signing the contract, La
y made it clear that he was signing
'as trustee of the Brodie family trust'. The family trust business has failed due to a
downturn in consumer demand and cannot meet its debts. The $15,000 owed to Winits
Pty Ltd has not been paid, and there are outstanding mortgages and many other debts.
From whom (if anyone) can Winits Pty Ltd recover the $15,000?
Answer to question 2:
Issue: Trustee and trustee’s liabilities to third party ?
Law:
Trust : The constitution of trust involves four essential requirements which are
Trustees, beneficiaries , trust property and trust obligation.
In general meaning a Trust involves a trustee holding certain assets in its name but for
the benefit of group of person and/or entities which is called as...