Are Tony and Ulysses entitled to receive more profit share than mentioned in the deed?
Are partners bound to pay liquor supplier $5000 that is more than the stipulated limit to be approved by any individual partner, as per the agreement?
Section 1 of the Partnership Act 1892 (NSW), provides that three elements must be satisfied in order to establish the existence of a partnership. These elements are:
The carrying on of a business;
With a view to profit.
The existence of a partnership is usually proved by the existence of a partnership agreement. Such an agreement can be either written or oral. According to section 24(1) of the Act the partners are entitled to share equally in the profits of the business, and must contribute equally towards the losses sustained by the firm unless a partnership deed provides to the contrary.
A partnership is not a separate legal entity. As a consequence, third parties must contract with individual partners. This raises an important issue whether the contract entered into by one partner is binding on the other partners. The Partnership Act addresses this issue by providing agency provision in Section 5 i.e. each partner is agent and principal of the others and owes fiduciary obligations to the others. Partners can bind each other and be bound by the actions of their partners. An agent may actually have actual authority (express or implied) or apparent authority (where a partner has no actual authority but appearance of authority). In case of apparent authority, problems arise when a partner exceeds his/her actual authority. (Harris et al, 2013, p.124)
According to section 5(1) of the Partnership Act 1892, if a partner contracts beyond his or her express authority (because they disregard some internal limitations on authority), a third party can still succeed in holding the partnership liable if he is able to show that the that the transaction was lying within the usual implied authority of partner of a firm carrying on that type of business, unless other partners can prove that the third party was aware of the partner’s lack of authority or that he didn’t know the person to be a partner. So section 5(1) protects the 3rd party in the sense that:
1. the act or transaction was entered into by a partner;
2. must be within the scope of the kind of business carried on by the firm;
3. the act or transaction must be effected in the usual way; and,
4. the other party to the transaction must either know or believe that the person acting is a partner or must not know of his or her lack of authority to act.
Given that the above mentioned conditions are met, the 3rd party can still hold the other partners liable, even if the partner, the 3rd party was dealing with was exceeding his or her authority. To reinforce this, the Act expressly states in Section 8 that any agreement between partners limiting their authority will affect 3rd party rights only if 3rd party was aware of the agreement. An example of application of these rules is provided by Mercantile Credit Ltd v Garrod  3 All ER 1103.
Given that profit distribution terms for first year of operation were set out in the partnership deed, all partner are bound to accept profits according to that proportion. Stavros is entitled to receive half of profit $180,000 made in the first year because of his experience, as per the agreement made. Had there been no partnership agreement, profits would have been distributed in equal proportions. But whenever an agreement is there, its terms and conditions are binding upon the partners.
As Stavros is a partner of the firm and has got actual and apparent authority to make agreements on the behalf of firm. When he purchases ouzo, just as a routine buying of the business items and in a usual way, the supplier supplies him being a partner of firm being unaware of his transaction authorization limit as this is