Question

Teresa and Alison operate a partnership making and selling jam. A reduced supply of fruit has resulted in a fall in sales. Alison purchased a large supply of glass jars that must be paid for within 30 days. The funds are not available to meet this expense. Teresa was not consulted when Alison bought the jars and insists that Alison pay for them out of her personal savings.

What do you think will be the legal consequences here resulting from Teresa’s decision not to consult Alison?

Answer 1

o Apparent authority: only arises where the question of actual authority is lacking. If a third party is to success against a firm, they must establish that:

 the particular partner was acting within the scope of the business the kind carried on by the firm (a question of fact in

each case);

 the transaction was carried out in the usual way;

 they knew or reasonably believed that the partner was a partner;

and

 they were not aware that the partner lacked authority to bind the

firm.

o If the third party knows that the particular partner has no authority, or

doesn’t believe the person to be a partner, then no action will be able

to be taken against the firm.

o In other words, such knowledge will negate an outsider’s reliance on

the partner’s apparent authority.

 Even if a partner lacks actual authority, any act they perform for carrying on,

in the usual way, business of the kind carried on by their firm will bind the firm

and their co-partners.

 This is because the partner so acting has apparent authority in the eyes of the

outsiders with whom they are dealing.

Given theabove principles, the following legal consequences may be stated:

 The partnership’s creditor can sue both Teresa and Allison jointly. In NSW,

partners’ liability is joint and several.

 If the creditor wins, the partnership pays for the costs of the jars and

damages.

 Allison owes a fiduciary duty of utmost good faith towards Teresa. This means

that she should have consulted Teresa before undertaking any act which

might bind the partnership.

 In terms of indemnity, as the partnership has no funds to pay for the jars, if

Teresa pays for them out of her personal funds, she can recover a proportion

or claim reimbursement from Allison.

 In saying this, it is arguable whether Allison should be made to pay for the

order out of her personal funds since she bought the jars for the benefit of the

partnership. A more equitable remedy is for both partners to share the costs of jars pro-rata or in proportion to their ownership interest.