Business partnerships and third party liabilities
Published in: February 2017
A large number of Australian commercial entities are partnerships that frequently need to deal with third parties and other external entities in the course of business. When an issue of liability occurs, the nature of the partner relationship may dictate that the actions of one person in the partnership impact on the other. Accordingly, both partners must remember that their actions in relation to outside parties may affect all persons involved in a partnership.
What actions are binding?
Except for New South Wales, all Australian jurisdictions have statutes that bind any partner undertaking acts on behalf of the business. For example, s 5 of the Partnership Act 1958 (Vic), states the following:
“Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.”
In summation, this section holds that any act undertaken by a partner for the purpose of the business partnership binds the other except if the outside party knows that the partner lacks the authority to act for the business in the particular matter, or is unaware that the person is a partner.
Within partnerships, a partner can be both an agent and a principle of the partnership. As such, one partner can bind the other, while the partners may also be bound by each other.
A partner making representations concerning the affairs of the partnership that is in the ordinary course of business, may be used as evidence against the partnership if a matter arises. Except in cases of fraud, any notice provided to one partner, can also be considered as notice against the partnership.
Debts of the partnership and liabilities
As a rule, if a debt is incurred, the liability is joint. As such, a creditor can only bring a single action against the partnership. Any partner can request a stay on any action until all partners are a party to the action. In this instance, the debt should be joint rather than joint and several.
If judgment is in relation to one partner, no action can be taken against the other members of the partnership.
Deceased members of the partnership
In the case that one member of the partnership has died, the estate of that partner is severally liable for the debts of the partnership contracted before the death of the partner. However, the debts may first be subject to prior payments of any debts incurred by the partner separately.
Ultimately, it’s crucial to be mindful that the actions of a partner in the ordinary conducting of a business can affect the other partner.
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