Partnership

Private profit of partners
Every partner must account to the firm for any benefit derived from:
 any transaction concerning the partnership; or

 any use by him or her of the partnership property, name or business connection (sec 29(1)); or

 any transaction undertaken after the partnership has been dissolved by the death of a partner and before its affairs have been completely wound up (sec 29(2).
This will be so were the benefit was obtained by the partner without the consent of the other partners.
A partner's obligations to the partnership do not cease until the partnership is wound up, so that any new agreement entered into by a partner prior to winding up, even if after dissolution, will be a partnership asset. In Chan v Zacharia (1984) 154 CLR 178, the appellant and respondent were medical practitioners. In September 1978 they entered into a written memoran­dum of agreement under which Dr Zacharia agreed to sell, and Dr Chan agreed to purchase, one half of Dr Zacharia’s ‘right title goodwill and interest’ in a medical practice which Dr Zacharia was then carrying on in Adelaide, together with the ‘plant equipment and chattels and other assets of the medical practice (excluding book debts)’.
Under the agreement the two doctors agreed to carry on medical practice as equal partners for a period of one year (and thereafter until determined by notice or death) upon the terms set out in the agreement. The agreement provided, inter alia, that upon determination of the partnership an account was to be taken of assets, debts and liabilities, the assets (other than goodwill) were to be sold and, after payment of liabilities and expenses and unpaid profits due to partners, any balance was to be divided equally between the partners.
The business was conducted at premises which had considerable advantages for such a medical practice and over which a three-year lease with an option to renew for another two years was held. The option had to be exercised not later than three months before its termination by the ‘tenant’, by which term the doctors were referred to in the lease. The lease and any renewed lease was assignable with the consent of the lessor, which was not to be unreasonably or capriciously withheld. During the third year of the lease the partnership was determined by notice given by the appellant and a receiver for the purpose of winding up was appointed by court order. The respondent wished to exercise the option of renewal of the lease but the appellant did not join with him in doing so and the option was not exercised. Before expiry of the time for its exercise the appellant then sought a renewal for two years, not for the partnership but for himself. Subsequently arrangements were made between the appellant and the owner of the premises for a lease for two years on payment of a premium.
An issue for determination was whether the interest acquired by the appellant in a new lease was an asset of the former partnership and was held by him as a constructive trustee. The High Court (Gibbs CJ, Brennan, Deane, and Dawson JJ) (Murphy J dissenting) held that there was a fiduciary relationship between the partners with respect to partnership property, which arose from the partnership and continued after its dissolution for the purpose of the realisation, application and distribution of the partnership assets. In these circumstances the appellant had obtained a new lease in disregard of that fiduciary relationship and was therefore bound to account to the partnership as a constructive trustee for any benefit he received from the new lease.
According to Deane and Dawson JJ the partners were under a dual obligation in respect of the original lease, and this obligation continued after the partnership’s dissolution. This arose from the fact that they held the lease as trustees for the partnership and from their fiduciary obligations as partners. Therefore the obligation of the appellant to account arose from both aspects of their obligation.
Also their Honours added that where a partner without the consent of his or her co-partner, obtains a renewal in his or her own name of a lease of partnership premises, there is a rebuttable presumption of fact that the renewed lease was obtained by use of his or her fiduciary position and that he or she holds it as a constructive trustee for the partnership.
A partner and, after the partner's death, his or her executor is liable to account to the other partners for undisclosed profits derived from the firm's business. see Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384.
However a partner may derive private benefits using information acquired from the partnership business where the source of the benefit is outside the scope of the partnership business and is not in competition with the business: see Aas v Benham [1891] 2 Ch 244.
If a partner, without consent of the other partners, carries on business of the same nature as and in competition with the business of the firm, he or she must account for and pay over to the firm all profits made by him or her in that business (sec 30). In Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, Birtchnell, Porter and others were land agents in partnership. After Porter died, the other partners found out that Porter, without disclosure, had profited from land speculation with clients of the firm. The other partners claimed that Porter’s executor should account for the profit made. The High Court agreed, as Porter profited as a result of his connection with the firm and the type of work was in the course of the firm’s business.
According to Dixon J, ‘he [Porter] pursued his separate interests, where the joint interests should have been consulted, and excluded the partnership from a benefit or chance of benefit which arose out of the connection of the firm’.
His Honour said at 412 that:
[The] partnership was entitled to avail itself of any opportunity to embark upon [any transaction] which came to the knowledge of the partners or any of them, and knowledge and information acquired by a partner as to the readiness of a client to share such profits, as to the conditions upon which he would do so, and generally as to every fact bearing upon the terms which the partnership might negotiate with him, were all matters which no partner could lawfully withhold from the firm and turn to his own account. The relation between such a client and the partnership is a matter affecting the joint interests which each member was bound to safeguard and protect, and no member could enter into dealings or engagements which conflicted or might conflict with those interests ...
Of the duties imposed by these doctrines, one which is material for the decision of this case is that which forbids a partner from withholding from the firm any opportunity of advantage which falls within the scope of its undertakings, and from using for his own exclusive benefit, information, knowledge or resources to which the firm is entitled ...
Another duty of present materiality is that which requires a fiduciary to refrain from engagements which conflict, or which may possibly conflict, with the interests of those whom he is bound to protect ... Further, and this, perhaps, is a necessary corollary, the partner is responsible to his firm for profits, although his firm could not itself have gained them.

Duties of partners which are set out in the Partnership Act
Sections 19-31 of the Partnership Act sets out variable rules which regulate partners. Briefly, these rules include the following:
1 Rights and duties of partners which are contained in their agreement with each other which are defined by the Act may be varied by the consent of all the partners (sec 19): see Public Trustee v Schultz (1964) 111 CLR 482.
2 Partnership property:
(a) All property, and rights and interests in property, originally brought into the partnership stock, or acquired on account of the firm or for the purposes and in the course of the partnership business, are known as ‘partnership property’ and must be used exclusively for the purposes of the partnership. (sec 20)
It is the acts and intention of the partners that determine whether property owned by a partner is in fact partnership property: see O’Brien v Komesaroff (1982) 150 CLR 310 (dealing with the ownership of copyright in precedent unit trust deeds which had been drafted by a solicitor) and Harvey v Harvey (1970) 120 CLR 529 (dealing with the ownership of a farm).
(b) If purchased with money belonging to the firm, then it is deemed to have been bought on the account of the firm (sec 21).
(c) If it is land that is held by the partnership, it becomes personal property (sec 22).
(d) A writ of execution levied against partnership property can only be issued if judgment has been obtained against the firm (sec 23).
(e) The Partnership Act also provides that every partner is entitled to have the property of the partnership applied in the payment of the debts and liabilities of the firm and to have any surplus assets after the payment applied in the payment of what is owing to the partners (sec 39).
3 With regards to matters of management, where there is no special agreement (sec 24):
(a) all partners are entitled to share equally in capital and profits and contribute equally towards losses;
(b) the firm is to indemnify partners with respect to payments made in the ordinary and proper conduct of the business of the firm;
(c) every partner may take part in management;
(d) no partner is entitled to remuneration;
(e) no person can be introduced as a partner without the consent of all existing partners;
(f) any difference arising as to ordinary matters connected with the partner­ship business may be decided by a majority of the partners; and
(g) the partnership books are to be kept at the place of business of the partnership.
4 No majority of partners can expel any partner unless power to do so has been conferred by express agreement (sec 25). In such cases the power to expel must be exercised in good faith.
5 Where no fixed term has been agreed upon for the duration of the partnership (where, that is, it is a partnership at will), any partner may determine the partnership at any time on giving notice (sec 26). In Moss v Elphick [1910] 1 KB 846, it was held that every partnership was one at will unless there is an agreement to the contrary. Note that, where a partnership for a fixed term is continued, then it is presumed that the continuation is in the old terms (sec 27).
6 Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or their legal representative (sec 28).
7. Partners must account to the firm for any benefit they derive without the consent of the other partners from any transaction concerning the partnership or for any use of partnership property, name or business connection (sec 29).
8. Finally the Partnership Act states that if a partner without the consent of their other partners carries on any business of the same nature as and competing with the firm, he or she must account for and pay over to the firm all profits made by him or her in that business (sec 30).

© 26 May 2011 Page