Companies & Partnership Law (COML2005) – SP5/2010
Assignment 1 – Indicative Answer
Question 1 – PRÉCIS (30% of assignment 1)
Write a précis of Construction Engineering (Aust) Pty Limited v Hexyl Pty Limited [1985] HCA 13; (1985) 155 CLR 541 and discuss how this case contributed to the law of partnership.
Précis
Construction Engineering (Aust) Pty Limited v Hexyl Pty Limited [1985] HCA 13 is a unanimous decision of the High Court of Australia on appeal against a decision of the NSW Court of Appeal.
Tambel (A/asia) Pty Ltd (-Tambel-) and Hexyl Pty Ltd (-Hexyl-) were partners for the purpose of the construction of a commercial building on some land owned by Tambel, at [5]. Tambel entered into a building contract with Construction Engineering Pty Ltd (-Construction-), at [1]. The contract contained a number of provisions which made it seem inappropriate that Tambel contracted for an undisclosed principal, at [8]. The partnership deed between Tambel and Hexyl expressly provided that Tambel should enter into the building contract as sole principal (at [5]) and Tambel made no representation to act for Hexyl as an undisclosed principal (at [9]). A dispute arose from the building contract and Construction sought to hold Hexyl liable for the building contract arguing it had been made by Tambel on behalf of the partnership between Tambel and Hexyl, at [2]. Construction did not know or believe that Tambel acted as an agent for a firm or Hexyl or anyone else as an undisclosed principal, at [9].
The High Court considered that the prima facie actual authority of a partner to act as an agent for the firm and Hexyl as undisclosed principal (at [7]) was negated by the express provisions that Tambel had to act as sole principal (at [4] and [5]) and went on to examine whether Tambel had apparent authority under the second limb of s5 of the Partnership Act 1892 (NSW)(-PA-).
The HCA held that the second limb of s5(1) PA effectively restates the common law position in that firm and its partners can only be bound by the acts of a partner lacking actual authority carrying on in the usual way business of the kind carried on by the firm unless the other party either knows that he has no authority, or does not know or believe him to be a partner (emphasis added, at [12]). Construction, however, conceded that it neither knew nor believed Tambel to be a partner, which resulted in the dismissal of the appeal.
Discussion
The Construction Engineering v Hexyl case is important because it was decided by the High Court of Australia and therefore binds all courts in Australia in their interpretation of provisions that are worded the same way as s5 of the Partnership Act 1892 (NSW). The decision is helpful because it clarifies that the statutory rule in the second limb of s5 PA re-states the position of the common law regarding apparent authority of partners, which differs from the liability of an undisclosed principal under the general rules of agency. The case also re-iterates that internal limitations of the authority of partners will not necessarily affect the rights of the outsider, who knows or believes that a partnership exists.3
Word Count: 489
Question 2 – Problem Solving (70% of assignment 1 marks)
Peter, who is an ambitious engineer from Adelaide and specialises in the design and the supervision of the construction of bridges, is keen to realise the new footbridge across Adelaide's Lake Torrens connecting the Convention Centre with the upgraded Adelaide Oval. Peter is excited that the South Australian state government has recently (see The Advertiser, 18.6.2010) announced a concept for $535 million redevelopment of the Adelaide Oval and that his bridge design is favoured by this concept.
To secure the construction of the footbridge Peter enters into negotiations with Batigroup, a major overseas construction company. Batigroup and Peter agree to build the bridge together as a consortium called -NewTech Constructions-. It is agreed that Batigroup will arrange for the project financing and perform the actual construction work. Peter is supposed to liaise with the state government and other stakeholders, adjust the bridge's design (if necessary) and supervise the construction as a project manager. It is planned to split expected profit 70:30 in favour of Batigroup, which bears the bigger financial risk.
(Proposed design by Peter; source: www.news.com.au)
The two parties also agree that their deal should be kept secret until the final project has been approved by the state government and Peter has secured the contract for the bridge.
Peter continues lobbying for the bridge concept. Without the knowledge or approval of Batigroup, he enters into contracts with local printers to print high-gloss brochures promoting his bridge design, and books advertising in The Advertiser and on local TV stations. All these contracts are made in the name of -NewTech Constructions- and signed by Peter as -Project Manager-.
Unfortunately, at the end of August 2010 the state government reveals the final design for the Adelaide Oval which includes a bridge designed by the world-renowned star architect and engineer Santiago Calatrava.
Peter is shattered, not only because he missed out on building his bridge, but also because he is unable to pay the remaining $100,000 for the printing and advertisement owed to The Advertiser and Channel Seven Network.
The Advertiser and Channel Seven Network later learn about Batigroup's involvement in -NewTech Constructions- and sue Batigroup for the outstanding amount.
Advise Batigroup as to their prospects in defending the law suit.
Issue(s)
The issues are whether Peter and Batigroup are partners and whether the contracts signed by Peter bind the partnership.
Rules
A partnership is the relation which exists between persons carrying on a business in common with view of profit.
The partnership is bound by acts of a partner carrying on in the usual way business of the kind carried on by the firm.
Application
Existence of partnership
Peter and Batigroup are persons that have some sort of relationship, but the other elements of the definition in s1(1) PA also need to be present:
- Carrying on Business:
According to s1B(1) PA -business- includes any trade or profession. Designing, supervising and building a bridge for money is both a profession and a trade; and therefore a -business-.
-Carrying on- can include single venture enterprises like the construction of one bridge, provided there is an intention to be partners.6 Here, the alleged partners not only work closely together and share profits; they also seem to care for their mutual wellbeing as they keep their cooperation secret until the contract is secured.
One could argue that they are not yet carrying on a business because the contract is not secured and construction has not started; the project is merely a preliminary activity similar to Goudberg v Herniman Associates Pty Ltd.7 However, Peter has already submitted his designs with some success and liaising with the government seems to be part of the overall business plan. The project, therefore, goes beyond preliminary activities8 and they seem to actually -carrying on a business-.
- View to profit:
Peter and Batigroup agreed to share profits implying that they want to make a profit. Such an intention to make an ultimate profit is all that is required.9
- In common:
Establishing the existence of a partnership one cannot rely on the label the involved parties give their relationship.10 Whether Peter and Batigroup call their relation -consortium- (which is usually used for joint ventures) is not decisive.
Peter and Batigroup share tasks : Peter is supposed to liaise with government and stakeholders (including lobbying) to secure the contract, he will adjust the design as needed and oversee the construction, while Batigroup organises finance and builds the bridge.
They carry their business under -NewTech Constructions- (NewTech) which seems to be a firmname in the sense of s4 PA.
There is an express agreement to share profits 70:30 between Batigroup and Peter. Profit sharing is prima facie evidence for the existence of a partnership.12 Although profit sharing does not establish a partnership in all cases, it seems that Peter and Batigroup have an intention to do business in common despite labelling their relationship a -consortium-.14
Hence, it is likely that Peter and Batigroup are in partnership.
Did Peter bind the partnership?
Peter entered into advertising contracts without Batigroup's knowledge or approval; hence, he did not have express authority to do so. It is arguable whether the advertising contracts were made for the purpose of the business in the sense of the first limb of s5(1) PA. The business of NewTech is to design and build a bridge. Although advertising may indirectly influence the government and the general public, the purpose of the business is not advertising. Hence, it seems unlikely that Peter had actual authority to enter into the contracts.
However, it is possible that Peter acted with apparent authority. The second limb of s5(1) PA requires that Peter's acts are within the scope of the particular type of business conducted by NewTech. This does not mean that the particular transaction (advertising) needs to be one that is usually entered into by NewTech. It is enough if the advertising is a type of transaction that is usually effected in the kind of business carried on by NewTech.16 One could argue that it is unusual to advertise a building project before the final approval of the design and the signing of the contract with the government. However, different concepts for building projects of general interest are often published before a final decision and promoting a particular project to gain further support is not unheard of. There are many examples where Private-Public-Partnership projects are advertising to gain support or acceptance, e.g. ASC advertising the construction of the Air Warfare Destroyer (AWD) in Adelaide. Hence, it seems that the advertising contracts signed by Peter are within the usual scope of a -business of the kind- run by NewTech and were executed -in the usual way-.
Peter signed the advertising contracts on behalf of -NewTech Constructions- thereby indicating that he did not (only) act in his own name. Due to the use of -NewTech Constructions- and the sheer size of the project it must be clear to any third party that Peter was not acting alone, even if he kept his -deal- with Batigroup secret by not disclosing the identity of Batigroup.17
If acts of an agent are done in the ordinary course of the business and if the third party is unaware of any restriction placed on the authority of the agent, the principal will be liable under general agency principles disregarding whether the third party knows that s/he is dealing with an agent or not.
Under the second limb of s(5)(1) PA, however, the undisclosed principal (dormant partner) will escape liability for the agent's unauthorised acts unless the third party -knows [or believes] that the person he deals with is a partner (...) although he does not know who the other partners in the firm are-.
The facts do not indicate that The Advertiser and Channel 7 (the -third parties-) knew that Peter lacked the authority to sign the contracts on behalf of NewTech. It is also likely that the third parties did not exactly know who Peter's partner was. As mentioned above, however, it must have been clear to the third parties that Peter did not act on his own and it is likely that that they at least believed that Peter was in partnership with someone. Accordingly, the contracts signed by Peter bind the partnership and therefore Batigroup.
Partners are jointly liable for contractual obligations of the partnership. As Peter is unable to pay, it is likely that Batigroup will have to pay the $100,000.
Conclusion
Peter and Batigroup are partners and because Peter's acts are likely to bind the firm, Batigroup will be liable to pay the $100,000 to the third parties.
Word count: 1,205