Was there a partnership?
77Turning then to the second legal issue, it is necessary to set out the principles relevant to identifying whether and when a partnership comes into existence. The Partnership Act 1892 defines a partnership in s 1 as follows:
1 Definition of partnership
(1) Partnership is the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership.
(2) But the relation between members of any company or association which is:
(a) incorporated under the Corporations Act 2001 of the Commonwealth, or
(b) Formed or incorporated by or in pursuance of any other Act of Parliament or Letters Patent or Royal Charter,
is not a Partnership within the meaning of this Act.
78The Act also lists a number of "rules" to have regard to when determining whether a partnership does or does not exist:
2 Rules for determining existence of partnership
In determining whether a partnership does or does not exist, regard shall be had to the following rules:
(1) Joint tenancy, tenancy in common, joint property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.
(2) The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.
(3) The receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but the receipt of such a share, or of a payment contingent on, or varying with the profits of a business does not of itself make the person a partner in the business; and in particular:
(a) The receipt by a person of a debt or other liquidated demand by instalments or otherwise out of the accruing profits of a business does not of itself make the person a partner in the business or liable as such:
(b) A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such:
(c) A person being the widow, widower or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such:
(d) The advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person, that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such: Provided that the contract is in writing and signed by or on behalf of all the parties thereto:
(e) A person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by the person of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.
79The question of whether a "business" has commenced is fundamental to the existence of a partnership. Perhaps the leading case on identifying whether and when a partnership comes into existence is the House of Lords decision in Khan v Miah [2000] 1 WLR 2123. The statutory definition of "partnership" in United Kingdom (under the Partnership Act 1890 (UK)) which was considered in Khan v Miah is materially identical to the definition in the Partnership Act in New South Wales. In Khan v Miah, the parties had proposed to open an Indian restaurant. To that end, they opened a bank account, acquired premises in the third defendant's name and laid out money in converting the premises from a showroom to a restaurant, purchasing furniture and equipment, and advertising. They also entered into a contract for laundry. The Court of Appeal, by majority, held that, although the parties had agreed to carry on a restaurant business, as they had not been trading as a restaurant when the relationship was terminated, they had not become partners in a restaurant business by the date when the relationship broke down (Khan v Miah [1998] 1 WLR 477). The House of Lords upheld an appeal from that conclusion and Lord Millett (with whom the other Law Lords agreed) observed (at 2127-2128):
I think that the majority of the Court of Appeal were guilty of nominalism. They thought that it was necessary, not merely to identify the joint venture into which the parties had agreed to enter, but to give it a particular description, and then to decide whether the parties had commenced to carry on a business of that description. They described the restaurant, meaning the preparation and serving of meals to customers, and asked themselves whether the restaurant had commenced trading by the relevant date. But this was an impossibly narrow view of the enterprise on which the parties agreed to embark. They did not intend to become partners in an existing business. They did not agree merely to take over and run a restaurant. They agreed to find suitable premises, fit them out as a restaurant and run the restaurant once they had set it up. The acquisition, conversion and fitting out of the premises and the purchase of furniture and equipment were all part of the joint venture, were undertaken with a view of ultimate profit and formed part of the business which the parties agreed to carry on in partnership together.
There is no rule of law that the parties to a joint venture do not become partners until actual trading commences. The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it, but it is not necessary to attach any particular name to it. Any commercial activity which is capable of being carried on by an individual is capable of being carried on in partnership. Many businesses require a great deal of expenditure to be incurred before trading commences. Films, for example, are commonly (for tax reasons) produced by limited partnerships. The making of a film is a business activity, at least if it is genuinely conducted with a view of profit. But the film rights have to be bought, the script commissioned, locations found, the director, actors and cameramen engaged, and the studio hired, long before the cameras start to roll.
The work of finding, acquiring and fitting out a shop or restaurant begins long before the premises are open for business and the first customers walk through the door. Such work is undertaken with a view of profit, and may be undertaken as well by partners as by a sole trader.
...
The question in the present case is not whether the parties "had so far advanced towards the establishment of a restaurant as properly to be described as having entered upon the trade of running a restaurant," for it does not matter how the enterprise should properly be described. The question is whether they had actually embarked upon the venture on which they had agreed... The question is not whether the restaurant had commenced trading, but whether the parties had done enough to be found to have commenced the joint enterprise in which they had agreed to engage. Once the judge found that the assets had been acquired, the liabilities incurred and the expenditure laid out in the course of the joint venture and with the authority of all parties, the conclusion inevitably followed.
80There is also recognised in law a distinction, which is sometimes difficult to draw, between a partnership and a joint venture. It has been observed in a number of cases, including United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 that the term "joint venture" does not have a settled common law meaning. Mason, Brennan and Deane JJ said (at 10):
The term "joint venture" is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots' law, "adventure") will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a "joint venture" and what should more properly be seen as no more than a simple contractual relationship may, on occasion, be blurred. Thus, where one party contributes only money or other property, it may sometimes be difficult to determine whether a relationship is a joint venture in which both parties are entitled to a share of profits or a simple contract of loan or a lease under which the interest or rent payable to the party providing the money or property is determined by reference to the profits made by the other.
81I note in passing that it is important to accurately characterise the relationship between the parties, because different remedies may flow depending on the legal nature of their relationship. A commonly stated distinction between a partnership and joint venture is that partners share profits arising from what is usually a business activity involving some continuity, whereas joint venture participants share product from what is usually but not always a single project or undertaking.
82In United Dominions Corporation Ltd v Brian Pty Ltd (at 15-16) Dawson J (agreeing with the majority) observed:
Perhaps in this country, the important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants. Enterprises of the latter kind are common enough in the exploration for and exploitation of mineral resources and the feature which is most likely to distinguish them from partnerships is the sharing of product rather than profit.
83The profits/product distinction appears to have been picked up in subsequent cases (see for example ARM Constructions Pty Ltd v Federal Commissioner of Taxation (1987) 87 ATC 4790 at 4805 per Yeldham J).
84In Gibson Motor Sport Merchandise Pty Ltd and Ors v Robert James Forbes and Ors [2005] FCA 749, Crennan J discussed the term "joint venture" in some detail and noted (at [78]-[80], selected passages, some citations omitted):
[78] Distinctions which can be made between a joint venture and a partnership are not always simple or without controversy. The term 'joint venture' has conventionally and commonly been used to refer to an association for the purposes of a single undertaking rather than for the continuous 'carrying on (of a) business' characterising a partnership...
[79] While joint venture agreements are generally governed by the principles applicable to contract and property, equity, through the mechanism of a constructive trust, may be called in aid in circumstances of incomplete agreement: Muschinski v Dodds (1985) 160 CLR 583 at 618, or called in aid because of a breach of a fiduciary duty: Ravinder Rohini Pty Ltd v Krizaic (1991) 30 FCR 300. Agreed contractual duties of joint venturers are not necessarily or routinely subject to any implied duty to act in good faith: Noranda Australia Ltd v Lachlan Resources N .L. (1988) 14 NSWLR 1; Australian Oil and Gas Corporation Ltd v Bridge Oil Ltd (1995) 14 AMPLA Bull 60 at 70; Kelly v C .A. & L. Bell Commodities Corporation Pty Ltd (1989) 18 NSWLR 248 at 258. See also the observations of Ormiston J in Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32 at 96-97.
[80] Recognisable and common characteristics of joint ventures include:
- Participants hold proprietary interests in the assets of the joint undertaking, often, but not necessarily, as tenants-in-common...
- Participants exercise joint control of the undertaking.
- Participants contribute to the joint undertaking, not necessarily equally; such contributions may be disparate...
- Participants in the joint undertaking enjoy rights and assume obligations, which are often several, and calculated by reference to ownership of shares and/or contributions made.
- Participants have a joint (or community of) interest in the performance of the undertaking's purpose...
- Participants associate in the undertaking for mutual commercial gain which can be mutual profits.
85In Thompson v White (2006) 13 BPR 24,537, Tobias JA (with whom Ipp and McColl JJA agreed) reviewed the relevant authorities and said (at [94]):
[94] What the foregoing establishes is that although the term "joint venture" has no settled common law meaning, it is conventionally and commonly used to refer to an association between persons for the purpose of a single undertaking for mutual commercial gain. Furthermore, the common characteristics of joint ventures identified by Crennan J cannot be said to be either severally or jointly both necessary and sufficient to constitute a joint venture agreement, it being a question of fact whether any particular undertaking constitutes a joint undertaking for mutual commercial gain.
86It has also been recognised that a joint venture does not ordinarily exhibit the same element of mutual confidence as would be present in a partnership relationship (Whywait Pty Ltd v Davidson [1997] 1 Qd R 225 at 231 per Macrossan CJ, Pincus and McPherson JJA).
87The involvement of some continuity of business activity in a relationship of partnership would appear to be consistent with the statutory requirement of "carrying on a business" (see s 1 in the Partnership Act). In Australia, however, that may not be the position. In United Dominions Corporation Ltd v Brian Pty Ltd, Dawson J said (at 15, some citations omitted):
Although in this country a partnership is defined in the Partnership Acts as the relation which subsists or exists between persons carrying on a business in common with a view of profit, the requirement that a business should be carried on provides no clear means of distinguishing a joint venture from a partnership. There may be a partnership for a single adventure or undertaking, for the Acts provide that, subject to any agreement between the partners, a partnership, if entered into for a single adventure or undertaking, is dissolved by the termination of that adventure or undertaking: see, eg, Partnership Act 1892 (NSW), s 32(b).
A single adventure under our law may or may not, depending upon its scope, amount to the carrying on of a business... Whilst the phrase "carrying on a business" contains an element of continuity or repetition in contrast with an isolated transaction which is not to be repeated, the decision of this court in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321, suggests that the emphasis which will be placed upon continuity may not be heavy.
88In determining the legal characterisation of the relationship of the parties the intention of the parties must be objectively ascertained from their words and conduct, and the description that the parties themselves have placed on their relationship is relevant but not conclusive (Bova v Avati [2009] NSWSC 921 at [181] per Ward J).