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MBS502 Trimester 1 2011/2012
Assignment problem
In January 2008, three good friends, Joe, Moe, and Shmo retired from academia. Each is an expert in different areas of financial management, investment strategy and retirement planning. They decided to start a financial advisory service in uptown Boyup Brook. Joe contributed $100,000, Moe contributed $50,000 and Shmo contributed $200,000 to establish the service.

They also borrow another $50,000 from Joe’s wife, Flo. The loan was to be repaid by giving her the first $10,000 of the profits made each year. It was also agreed that Flo would be the office manager on a salary of $45,000 per annum. They bought an appropriate building in Boyup Brook and, with the money left over, they built an extension/granny flat in which Shmo lives. Joe, Moe and Shmo agreed that all major decisions relating to the management of the service would require all three to agree.

The day to day management of the office was to be left to Flo. Boyup Brook has a large and growing population of retired farmers and public servants who are always concerned about the health of their retirement nest eggs. Joe, after discussions with Moe, Shmo and Flo, registered the business name, “The Money Doctors” because he believed they work with surgical precision when it comes to financial decision making. Business cards were duly printed and ties were designed with a pattern of dollar signs. In the recent past the following incidents occurred or were discovered. 1 Joe, Moe and Shmo had, earlier this year, discussed ways to improve the services they provided to clients.

One of the key areas they identified was their computer system and internet access. They agreed that an investment of up to $10,000 was appropriate and affordable in the current financial climate. While on a recent visit to Perth, Shmo attended the Perth International Education Expo. While there he encountered an old friend from his academic career, Elmo, who was also retired and was now an agent for Educational Computer Operators (ECO). Shmo told Elmo all about his exciting life in Boyup Brook and about the service he operated with their mutual friends, Joe and Moe.

The computer industry had, apparently, also been hard hit by the economic crisis and Shmo sensed that a bargain could be obtained. Shmo ordered 4 computers, a new server and a 24 month broadband satellite internet service. The total cost was $20,000. As part of the deal, for signing up at the Expo, Shmo was given $100 worth of Lotto tickets.

As luck would have it, one of these tickets won a share of the first division prize of $1,000,000. When the computer system arrived with the invoice demanding immediate payment, Flo knew nothing about it and Shmo was unavailable as he was on holiday in the Bahamas.

2 The service had a client, Mrs. McTavish, the widow of a prosperous farmer. Always one for a safe investment, Mrs. McTavish only accepted advise relating to Blue Chip shares and investments and normally only dealt with Shmo.

However, as a result of the recent world economic meltdown and the harrowing stories seen on a Current Affair on TV, Mrs. McTavish was growing very concerned about the health of her investments and how to make up for capital losses. Moe, in Shmo’s absence, sensed an opportunity and recommended to Mrs. McTavish that she invest in a company called Southern Land Opportunities (SLO) and to finance this investment by selling $1,000,000 worth of Commonwealth Bank and Telstra shares. Mrs. McTavish had always allowed Shmo to take care of the details of selling and transferring money to the appropriate accounts and investments.

This company, SLO, was one which Moe had established with his latest friend, Poe. It had no other share capital, no bank account and had not carried on any business. Within a week of the transaction, Moe had disappeared and no trace can be found of him or Mrs. McTavish’s money. Mrs. McTavish has already employed one of Perth’s biggest law firms and has brought an action against “The Money Doctors”.

Using only Partnership Law as it exists in Western Australia, answer the following; 1 Is “The Money Doctors” a partnership, and if so, who are the partners? 2 Who is liable for the contract with ECO?

3 Who is liable to Mrs. McTavish?

Question one,
The Money Doctors is a partnership by the definition as this activity covered by all four parameters by the partnership as below and also according to following rule of Western Australian Law; “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”. Partnership Act (WA) 1895 S/7 (1) Also the four element of partnership has been carried out, Agreement, as all parties agreed to, start a financial advisory service, pay certain amount as initial investment, purchase a building, lend money from a third party. As result there was a conducive agreement among the partners.

Business being carried out, according to the mentioned cases the business being carried out and the case of Mrs. MC Tavish and her previous experiences and the made trust in time with Shmo is the strong evidence of having business carried out. In common, all the parties have agreed to make
major decision together by having all parties opinion and also they have chosen a name, business card and USD sign on their ties for the partnership together based on common understanding. View of profit, in return of the lend money all parties agreed to pay $ 10,000 each from the profits which shows the partners had a view of profit.

Question two,
Whether all the partners were agreed to invest and improve the services provided to client by improving computer systems? Does Shmo have the authority to purchase $20K worth of computer equipment? How ECO dealt with Shmo?

Were there enough evidences of apparent authority from ECO to accept the deal? Whether if all the partners are liable to pay against Shmo’s commitment?

Rule of law,

“Every partner is jointly liable for any breach of contract – only one right of action against all the partners.” (Partnership Act 1895) [S16] WA “The case of Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd” [1971] 2 QB 711 By deification and based on four elements of partnership it is clear there is a partnership and according to above mentioned law (Partnership Act 1895) [S16] WA Shmu has the apparent authority to act on behalf of the firm.

The case of [1971] 2 QB 711 court has held as the secretory had apparent authority to act on behalf of the company so the company is liable against the made commitment.

As Shmo was acting on behalf of all parties carrying the business cards and wearing the tie with company logo he was having apparent authority to act on behalf of the firm even though the partners agreed to certain level of investment it doesn’t concern the second parties and the made commitments.

The rules of Law which needed to be considered in this case is section 16 of Western Australian low “Every partner is jointly liable for any breach of contract – only one right of action against all the partners.” (Partnership Act 1895) [S16] WA. The case is very similar to The case of “Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd” [1971] (2 QB 711) which the secretory hired a luxury car for personal use and court held that the company is liable to pay for the rented car as the secretory had apparent authority using company facilities and previous experiences.

Due to the apparent authority law “Every partner is jointly liable for any breach of contract – only one right of action against all the partners” (Partnership Act 1895) [S16] WA. And the case of “Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd” [1971] (2 QB 711 The Money Doctor has to pay for Shimo commitments as he had the apparent authority against to supplier and ordered consignment regardless of even Shmu has act over the internal agreement within the partners.

Question three,
What are the firm responsibilities as Financial Advisory firm? Is the firm as Financial Advisory has the right to act and to accept money from the clients and transfer the fund? Is the established relationship between Mrs. McTavish and Shmu is based on firm responsibilities and authorities or just been made in time due to personal relationship and successful experiences.

Whether if Mrs. McTavish knows Moe is involved with the SLO? Is there any evidence to prove how the transaction took place? Cash or bank to bank. As the SLO has no bank account why McTavish should trust to transfer such amount of money to unknown account? If McTavish gave the money to Moe in cash whether she knows Moe is acting beyond his apparent and actual authority?

Rules of law,
There are different factors to be considered in this case, As a Financial advisor Money Doctors should not accept cash and additional to that Moe had
breach the contract and abused McTavish trust for the sake of personal ambitions. Therefore in this case below rules of law has to be considered,

Where any money or property of a third person is received by one partner, acting within the scope of his real or apparent authority in the partnership affairs, and is misapplied by that partner, and where any money or property of a third person, being as such in the custody of the firm, is misapplied by any partner, the firm shall be liable to make good the loss. (Partnership Act 1895) [Section 18.1]

WA Where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his copartners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act. (Partnership Act 1895) [Section17.1] WA

According to Western Australia, Partnership Act law 1895, and Section17/1 if money or property is received by a partner in the scope of the real or apparent authority and misapplied the firm is liable to make good the loss. And Section 18/1if by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his copartners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable.

In this case partners were agreed to establish a financial advisory service to the clients and in the case of Mrs. McTavish she was allowing the Shmu to make the transactions on her behalf which is outside the authority of Financial Advisor. Based on the made trust Mrs. McTavish decided to act the same with Moe which no level of trust been made with Moe and Mrs. McTavish therefore more information is required to make sure if Mrs. McTavish knew Moe is acting beyond his authority otherwise the rules of law (Partnership Act 1895) [S18.A] WA is applicable.

Based on Agency law “If agent acts outside his/her actual and apparent authority s/he may be liable to both TP and PR” According on the given information the SLO company has no bank account therefore there is no way for Mrs. McTavish to transfer the money to bank account so the only possible way is for Moe to take the cash by himself and transfer the money to another account.

There are not enough information and evidences if Mrs. McTavish knew Moe is acting beyond his authority to refer the case to agency law as laws of Agency Law and Partnership Law can be applied in both fields. Therefore based on the actual given information and Partnership law “Partnership Act 1895) [Section 18.A] WA” and Partnership Act 1895 [Section17.1] WA is applicable.

If there were enough evidences that Mrs. McTavish did not know that Moe is acting beyond the actual or apparent authority Moe solely would be liable to Mrs. McTavish as accepting money for the transaction was out of his apparent and actual authority but there are not enough evidences therefore the firm is liable to Mrs. McTavish according to abve mentioned rules of law.

Partnership Law (WA) : Australasian Legal Information Institute http://www.austlii.com

The case of Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd” [1971] 2 QB 711 PARTNERSHIP ACT 1895 – SECT 16
16 . Liability of partners

(Partnership Act 1895) [Section17.1] WA
17 . Liability of firm for wrongs

18 . Misapplication of money or property

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