OPEN UNIVERSITY MALAYSIA

FACULTY OF BUSINESS MANAGEMENT

BMLW 5103

Business Law

Master of Business Administration

Name: Adam Khaleel

Lecturer: Fayyaz Shathir

Learning Centre: Villa College

Trimester: September 2014

1.0 Executive Summary

2.0 Question – 1.

2.1 Part (a) Solution:

2.2 Part (b) Solution:

3.0 Question – 2.

3.1 Part (a) Solution

3.2 Part (b) Solution:

4.0 References

5.0 Case Laws

1.0 Executive Summary

The purposes of this assignment are to understand the elements which effect free consent in a contract and the formation and dissolution of a partnership. This paper contains two questions. The first question is regarding the elements which affect the free consent mainly the misrepresentation, fraud and mistake. The second question is based on rights of partners in partnership and dissolution of partnership agreement through court. The answers will be justified with correct provisions under respective statutes, relevant precedents and case laws which connote to the correct answers. The Contract Act 1950 and Partnership Act 1961 of Malaysia will be the two major source of references for this assignment. The first question will be answered based on Contract Act 1950 and the second question will be answered based on Partnership Act 1961.

2.0 Question – 1.

2.1 Part (a) Solution:

General Introduction for the parts A and B of question 1.

This question will be answered based on Contract Act 1950 and relevant cases. Contract defined by Contract Act 1950 Sec 2(h) says “an agreement enforceable by law is a contract”. Function of a contract are to secure the expectation created by a promise of future performance or expectation will be paid for its breach and to facilitate forward planning of the transaction in terms of cost and value, responsibilities of parties and preparation for contingencies. Therefore the contract is the instrument by which separate and conflicting interests of the parties can be reconciled and brought to common goal.

According to Contract Act 1950, in order to form a contract agreement that is enforceable by law, the six elements must be fulfilled which are proposal or offer, acceptance, consideration, intention to create legal relations, capacity to contract and free consent. Sec 10 of Contract Act says that agreements are contracts if they are made by the free consent of the parties. Section 13 elaborates it as “two or more person are said to consent when they agree upon the same thing in the same sense”. Hence, consent must be free. Sec 14 says that consent is free when not caused by coercion (Sec 15), undue influence (Sec 16), fraud (Sec 17), misrepresentation (Sec 18) and mistake (Sec 21, 22 and 23). Therefore consent is not freely given when it is caused by misrepresentation. In such cases the contract may be set aside by the court and declared the said contract either void or voidable.

Part A: Misrepresentation

According to section 18, misrepresentation refer to certain false statement of existing or past fact made by a person before or at the time of making the contract which induces a party to enter into a contract. False statement of fact made by one party before or at the time of making the contract, which is addressed to other party and induces the other party to enter into the contract. Furthermore, the maker believe in the truth of the statement (the maker honestly believed that facts of such statement is True, in fact the said statement is False). For instance, A (seller) is telling the buyer (B) that a radio is "practically new" so that B buy it, it is in fact 5 years old and heavily been used. So in the above example, if the seller didn't know the radio was actually old, he would only be liable for an innocent misrepresentation.

Types of misrepresentation (circumstances of misrepresentation)

1. Fraudulent misrepresentation: Sec (a) says that false statement where the party making the statement is aware that it is false or disregards the possibility of it being false, the party making the statement does so to induce another party to enter into a contract, and the other party enters the contract as a result of the statement and consequently suffers a loss. In the case of Derry v Peek (1889), it was held the statement was not fraudulent but made in the honest belief that approval was forthcoming. Lord Herschell defined fraudulent misrepresentation as a statement which is made either: knowing it to be false, without belief in its truth, or recklessly, careless as to whether it be true or false.

2. Innocent misrepresentation: Sec18 (c) says that representation of one of the fact which is not true but he believes it to be true. In the light of Hedley Byrne case the word innocent may now be used to refer to a statement made by a person who has reasonable grounds for believing in its truth. To avoid confusion, “wholly innocent” is a better description.

3. Negligent Misrepresentation: Sec 18(b) says that there is a duty imposed to a party to disclose information to each other but the parties failed to do it or breach of it. Basically, it means that you did not directly lie (without intention to deceive), but you made a representation about something while having no reasonable reasons for believing it to be true. For instance, a broker tries to sell a house to a buyer, who stresses his need for peace and quiet. The broker promises that the house is very quiet. In reality, the house next door is undergoing a very noisy reconstruction. Although the broker did not know this, his promise of that house was quiet was made without he having any reason to believe that was the case. He simply assumed that the house is quiet. The broker in this case is making negligent misrepresentation. In the case of Howard Marine v Ogden: it was held the defendant had not discharged the burden of proof by demonstrating they had reasonable grounds for believing it to be true as they had the registration document which contained the correct capacity and there was no reason why they would have chosen Lloyds register over the registration document.

Duty of Misled Party to Exercise Diligence

The misrepresentation does not make the contract voidable if the misled party had the opportunity to investigate and ascertain the truth of the representation. Sec 19 says that misled party has duty to exercise due diligence. In the case of Tan Chye Chew v. Eastern Mining Metals: The contract was not voidable despite the misrepresentation as the party has means of discovering the truth with ordinary diligence.

In the case of Caparo Industries v Dickman: An auditor (Dickman) who had negligently approved an overstated account of a company's profitability. A takeover bidder (Caparo) relied on these statements and pursued its takeover on the basis that the company's finances were sound. Once it had spent its money acquiring the company's shares and a company control, it found that the finances were in poorer shape than it had been led to believe. Caparo sued the auditor for negligence misrepresentation. The House of Lords however held: there was no duty of care between an auditor and a third party pursuing a takeover bid. The auditor had done the audit for the company. The bidder could have paid for and done its own audit.

Elements of misrepresentation: (Misrepresentation to be actionable)

1. There must be false representation. The example is King, R v (1986) case. D falsely claimed he was a tree surgeon and told V that four trees in her garden were dangerous and needed felling. D offered to sell them for £470 cash. While V was withdrawing the cash the police were informed. D claimed that V was not induced to part with the money as a result of the deception but as a result of the work that would have been done. Held: whether the false representation was operative in causing the obtaining of the property was an issue of fact to be decided by the jury. In this case, there was ample evidence to suggest that if the money had been paid it would have been as a result of the false representation made to V.

2. The Misrepresentation must be one fact (mere expression of opinion is not a representation of fact). The example is Bisset v. Wilkinson case. The claimant purchased a piece of farm land to use as a sheep farm. He asked the seller how many sheep the land would hold. The seller had not used it as a sheep farm but estimated that it would carry 2,000 sheep. In reliance of this statement the claimant purchased the land. The estimate turned out to be wrong and the claimant brought an action for misrepresentation. The Privy Council held that the statement was only a statement of opinion and not a statement of fact and therefore not an actionable misrepresentation. The claimant's action was therefore unsuccessful.

3. The statement was addressed to the party misled. The example is Peek v. Gurney case. P purchased shares in a company on the basis of statements made in the prospectus issued by G. certain statements were false and p sued the directors. P was not the original allottee but had purchased the shares on the open market even though he had read the prospectus his claim failed because the statements in the prospectus were only intended to mislead the original allottees.

4. The misrepresentation must influence a party in deciding whether or not to enter into the contract. Example is Edgington v Fitzmaurice case. The claimant purchased some shares in the defendant company. The company prospectus stated the shares were being offered in order to raise money to expand the company. In fact the company was experiencing financial difficulty and the money raised from the sale of the shares was going to be used to pay the company debts. Held: Despite the fact that the statement related to a statement of future intent, it was an actionable misrepresentation as the defendant had no intention of using the money to expand the company.

5. The P must have suffered damage as a result of misrepresentation. The example is Peek v. Gurney case.

Thus misrepresentation is not actionable if representee never knew of its existence (example case is Horsfall v. Thomas) and did not allow it to affect their judgment (example case is Smith v. Chadwick & Atwood v. Small).

Opinion is not a misrepresentation

In the case of Bisset v Wilkinson: Contract of sale a poultry farm is valid even though the seller made a statement that the farm can breed 2000 sheep is not true. It is because it is an opinion. He never breeds a sheep at the farm before. Thus, the contract is valid.

Silence is not misrepresentation

Generally, a party to a contract is not bound to disclose materials facts to the other party. In the case of Keats v Lord Cardogan: D lets a house that was in bad condition to P. P however, never ask any information from D with regard to the house. The act of D is not misrepresentation P should caution and investigate.

Remedies of Misrepresentation

Section 65 & 66 says that any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

Per Abdul Malik Ishak J. in Travelsight (M) Sdn Bhd & Anor v Atlas Corp Sdn Bhd [2003] 6 MLJ 658: Case summary

On 15 March 1996, the first plaintiff agreed to purchase from the defendant a piece of property Wisma Pantai, Kuala Lumpur (hereinafter referred to as the said "property") for the purchase price of RM816,696 subject to the terms and conditions as contained in the sale and purchase agreement (hereinafter referred to as the said "agreement"). The relevant terms and conditions of the said agreement which the defendant represented to the first plaintiff were the first plaintiff contracted to purchase the said property at the purchase price of RM816,696 and the said property measured in area approximately 1,592 square feet with the Building Plans having been approved by the Appropriate Authority.

Held:

Defendant has breached the terms of the Sale and Purchase Agreement dated 15.3.96 and that the 1st Plaintiff has rightfully terminated Agreement in 13.2.2001 or Honorable Court finds it just and fair due to the breach of contract by the Defendant. The Defendant is to refund the entire amount paid by the Plaintiffs. The Defendant to pay special damages amounting to RM109615.18. The Defendant to pay general damages that is to be assessed by this Honorable Court. The Defendant to pay interest at the rate of 8% per annum on the sum. The damages as contained is to be used to redeem the charge from the Second Plaintiff. All further and other reliefs.

My analysis and opinion about the facts and decisions made by the court regarding this case are as follows;

Misrepresentation 1:

The size of the said property had been reduced to 1470 square feet from 1592 square feet - a loss or a shortfall of 122 square feet. It seemed that that shortfall in the size of the office suite had defeated the purpose of the first plaintiff in purchasing the said property because the finished product was not suitable for the first plaintiff's business enterprise. Plaintiff addressed to the defendant expressed its dissatisfaction and stated its intention to rescind the said agreement.

Misrepresentation 2:

The first plaintiff too was misrepresented that the building plans had been approved at the time of signing the said agreement which in reality was untrue. Because of the failure by defendant to keep to the terms and conditions of the said agreement, the first plaintiff then gave notice to rescind the said agreement for breach of contract.

In the case of Pertab Chunder Ghose v. Mohendra Purkait [1888-89], Sir Richard Couch in giving the judgment of the Privy Council said at p. 237, where one party induces the other to contract on the faith of representations made to him, anyone of which is untrue, the whole contract is, in a Court of Equity, considered as having been obtained fraudulently... Therefore, the two misrepresentation in this case are fraudulent.

The degree of reliance on the misrepresentation.

The first plaintiff had relied on the material representations by the defendant pertaining to the size of the said property to be 1,592 square feet and that at the time the said agreement was executed the Building Plans have been approved by the Appropriate Authority. These material representations were false and they constituted misrepresentations in law. At no time did the first plaintiff employ its own experts to ascertain the truth of these two representations before executing the said agreement like what Small did in the case of Attwood v. Small. The defendant knew about the entire project wherein the said property was part of it and whatever representations which the defendant made in the said agreement must be held against the defendant as material misrepresentations when those representations were found to be false - untrue.

If the misrepresentation is substantial the vendor will be unable to enforce the contract, even with an abatement of the price (Flight v. Booth [1834]). If the misrepresentation is not substantial, then, provided that the misrepresentation was made innocently, the vendor will be able to enforce the contract, although subject to an abatement of the price by way of compensation for the insubstantial deficiency (Jacobs v. Revell [1900]). This is so even though the purchaser would prefer to rescind (Re Brewer and Hankin's Contract [1899]). The two misrepresentations by the defendant to the first plaintiff were certainly substantial. It differed from what the first plaintiff had bargained for. The first plaintiff was bargaining for the said property with the size of 1,592 square feet and not 1470 square feet. The first plaintiff too was misrepresented that the building plans had been approved at the time of signing the said agreement which in reality was untrue.

Based on my findings of Contract Act 1950 and the relevant cases about the misrepresentation, I agree that the decisions made by the court regarding this case was just and fair.

Conclusion

The statements made in regard to a contract is essential and determine the elements of misrepresentation. If the injured party in a contractual dispute who is claiming misrepresentation wouldn't have entered the contract had the statement not been made, then the statement becomes a term of the contract. Therefore, once the statement is made, if the information is inaccurate, misleading, or misrepresented, the injured party can nullify the contract because the person who made the misleading statement breached the terms of the contract by giving misleading information.

2.2 Part (b) Solution:

Material facts

1. Ahmad entered a contract to purchase the antique watch from Farisham on 4th March 2014.

2. The antique watch was described by Farisham in good faith to Ahmed.

3. Farisham described that the watch was more than 100 years of age.

4. Ahmad paid the deposit of RM10 000 out of the total price of RM 50 000.

5. Ahmed promised to pay the balance (RM40000) within one week.

6. On 6th March 2014, Yatt told Ahmed that she was the person who sold that antique watch to Farisham.

7. Yatt told Ahmad that the watch is not very old as her father bought the watch on 31 August 1957 (watch was 56 years and 6 months old).

8. Ahmed immediately sent an e-mail to Farisham which stated that he intended to terminate the contract because there was a misrepresentation of fact.

9. Ahmad wanted to claim back the RM 10 000 of deposit made.

Issues:

1. Was Farisham described the watch in good faith to Ahmed?

2. Is there any misrepresentation? Was the description of age of watch a misrepresentation?

3. Is there any other issue like fraud or mistake by Farisham?

4. Can Ahmed terminate the contract and can he claim back the deposit?

Presumptions

1. Farisham knows the actual age of the watch.

2. Yatt was the seller of watch to Farisham.

3. Yatt gave the true information in good faith to Farisham and Ahmed.

Rule / Ratio (reasons for decision) of cases or provisions in Contract Act

Fraud

Section 14(c) of the Contract Act provides that the consent given caused by fraud is not a valid consent (not freely given). Fraud is a deception made for personal gain or to damage another individual. Certain acts which are committed with intent to deceive another party or to induce him to enter into a contract. For Example, the seller found the necklace on the street, he then told the buyer that it was new and special edition.

Elements of fraud

Sec 17 of CA says that fraud includes a) fraud includes the suggestion as to fact which is not true by one who does not believe it to be true. (The maker knows the facts are not true/ false). In the case of Kheng Chwee Lian v Wong Tak Thong: the respondent had been persuaded by the appellant to enter into second contract on the false representation that the area of land to be transferred was the same size as the land which the respondent had agreed to buy under a first agreement. In fact, the area even less than that. Court held: The respondent had been induced by fraudulent misrepresentation into signing the second agreement and that misrepresentation was fraudulent meaning of Section 17 (a) and (d).

Sec 17 b) the active concealment of a fact by one having knowledge of belief of the fact. In the case of Letchemy Arumugan v Annamalay: the defendant had induced the plaintiff an illiterate Indian woman to enter into sale and purchase agreement. The defendant had fraudulently represented to the plaintiff that the document that she was signed was for loan she took and it was to free the land from a charge. In fact the document that she signed was included a sale agreement relating to land, a transfer of the land and further agreement to purchase three unapproved sub-lots in her own land. Held: The agreement was voidable.

Sec 17 c) ‏ a promise made without any intention of performing it. In the case of Skim Cepat Kaya and Kad Gores & Menang: The owner of the house (A) promised to the tenant (B) that he will repair the defects of the house and he will disburse the said repairs done by the tenant. However, after the said repairs are completed, the owner of the house refused to pay that. He actually from the very beginning does not intend to pay for that. A = a promise made without an intention to perform it'

Sec 17 says that mere silence as to facts likely to affect the willingness of a person to enter into contract is not fraud unless the person has the duty to speak or his silence is equivalent to speech.

Mistake

When one party to a contract enters into it under some misunderstanding. The contract entered into is invalid/ void as if they know the true facts they would never have entered into the contract.

Elements of mistake

Section 21 says that 1) both parties to an agreement under mistake (mutual)‏ and ii) mistake relating to a “matter of fact essential to the agreement”. Illustrations: A) Mistake as to existence of subject matter or where both parties were unaware that the subject matter of the contract of the contract had already perished at the time of contract was entered into. B) Mistake as to identity of subject matter. In the case of Raffles v Wichelhaus held: The court concluded there was “no binding contract.” Since the parties meant different ships and there was a mistake as to identity of the subject matter by both Raffles and Wichelhaus. C) Mistake as the possibility of performing the contract. In the case of Sheikh Brother’s v Ochsner held: it was mistake as to the possibility of performing the contract. The said agreement was void.

2) Mistake of Facts by 1 party (Unilateral mistake)

Section 23 says that the contract is not voidable or still valid. But the party making the mistake would be entitled to an order of rescission. 1) Mistake as to identity of party to the contract E.g: A wants to contract with B but instead contracted with C. 2) Mistake as to quality of subject matter. E.g: A agrees to buy from B a picture that A believe to be genuine Lat’s drawing but which in fact was painted by Leman. B in this case intends to sell a picture by Leman but A believes that the sale is of a picture painted by Lat. What is the effect of the said contract? A = mistake as to quality of subject matter= not voidable = right to rescission.

Sec 22 says that mistake as to the law - contract not voidable due to mistake of law in force in Malaysia, but if the law not in force in Malaysia - like mistake of fact.

Misrepresentation (summary of part A)

Types of misrepresentation (circumstances of misrepresentation)

2. Innocent misrepresentation: Sec18 (c) says that representation of one of the fact which is not true but he believes it to be true. The example case is Hedley Byrne.

Duty of Misled Party to Exercise Diligence

Elements of misrepresentation: (Misrepresentation to be actionable)

5. The P must have suffered damage as a result of misrepresentation. The example is Peek v. Gurney case.

Opinion is not a misrepresentation

Silence is not misrepresentation

Voidable contract

Voidable contract - Sec 2 (i) says “an agreement which is enforceable by law at the option of one or more parties, but not the others….” Sec 10 says that agreements are contracts if they are made by the free consent of the parties. Section 13 elaborates it as “two or more person are said to consent when they agree upon the same thing in the same sense”. Hence, consent must be free. Sec 14 says that consent is free when not caused by coercion (Sec 15), undue influence (Sec 16), fraud (Sec 17), misrepresentation (Sec 18) and mistake (Sec 21, 22 and 23). Therefore consent is not freely given when it is caused by misrepresentation. In such cases the contract may be set aside by the court and declared the said contract either void or voidable. According to the Sec 24 contract with unlawful consideration or object like fraudulent statement (Eg case: Palaniappa Chettiar) and involves injury to person or property (Eg case: Syed Ahamed Alhabshee V. Putehis) etc. is void.

Recover of deposit and claim for damages

Sec 74 says “when a contract has been broken, the party who suffers is entitled to receive…..compensation for any loss or damage….which naturally arose in the usual course of things..or which the parties knew, when they made the contract, to be likely to result from the breach”. In the case of Yeep Mooi v. Chu Chin Chua: it was held that money deposited with a company carrying unlicensed business is recoverable.

Discharge of contract

1. by consent or agreement between the parties

Sec 63 says that if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Sec 64 says that every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.

2. by breach.

Sec 40 says “When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.” Party not in breach has the option of continuing with the contract and claim damages or repudiate the contract. Sec 65 says “when a person at whose option a contract is voidable rescinds it, the other thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore the benefit, so far as may be, to the person from whom it was received.”

Application of rules to the facts

This problem is based on description of age of the watch made by Farisham. In this case Farisham made a statement which induced Ahmed to purchase the firm, but the statement turns out to be untrue and Ahmed feels aggrieved and wanted to terminate contract because of misrepresentation.

It is apparent that Farisham’s statement is not a fraud because there is no active concealment of age of the watch by Farisham, there is no evidence that he knows the actual age of watch and he has given the descriptions of age of watch in good faith. Meantime it cannot be considered as a mistake because there is no mutual mistake. Although it seems that Farisham made a mistake, it cannot considered as a mistake because Farisham knows the fact according to the Yatt.

However, it can be considered as a misrepresentation of facts by Farisham. There is possibility that it could be a fraudulent misrepresentation because Farisham may wanted to induce and sell the watch to Ahmed at a higher price. Example case is Derry v Peek. There is no possibility that it could be an innocent or a negligent Misrepresentation because Farisham directly lied Ahmed according to Yatt.

This misrepresentation is actionable because there was false representation by Farisham, misrepresentation was a fact not an opinion, the statement was addressed to the party (Ahmed) misled, the misrepresentation persuaded Ahmed and Ahmed had suffered damage as a result of misrepresentation because he might not be able to sell the watch above RM50000 (cost prize).

The misrepresentation does not make the contract voidable if the misled party (Ahmed) had the opportunity to investigate and ascertain the truth of the representation. Since there is misrepresentation by Farisham consent is not freely given. In this case the contract can be voidable. The contract can be discharged by Ahmed because Farisham had breached the contract and Ahmed can claim back the deposit of RM10000 paid to Farisham. Meantime, Ahmed has option continue the contract and ask for only for the damages.

Opinion

Farisham either unintentionally, erroneously, or egregiously misrepresented the facts of the watch. Regardless of the reasoning behind why Farisham gave inaccurate information, Ahmed relied upon inaccurate information regarding the age of the watch for his agreement in the contract. Because he was given false information about the age of the watch by Farisham, Farisham breached the contract. Therefore Ahmed can terminate the contact claim back the deposit paid.

3.0 Question – 2.

3.1 Part (a) Solution

General introduction for question 2 part A & B

This question will be answered with the references of Partnership Act 1961 and relevant cases. Section 3(1) of the Partnership Act 1961 defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". Partnership, however, does not include clubs, societies, mutual benefit organizations and building societies. The relationship between partners may be regulated by a partnership agreement made by the partners which outlines the rights and duties and other terms relating to business management, division of capital and profits of each partner. In the absence of partnership agreement between the partners, there are certain rights and duties of partners. Also there are several ways in which a partnership may be terminated

Material facts

1. Raju and Kamala started a partnership in June 2000.

2. Agreement stated that the partnership remain for ten years.

3. In December 2010, Kamala took a personal loan from Bank Business and failed to pay three installments.

4. After that Kamala assigned her interest in the firm to Bank Business.

5. As a result Raju gave a notice to Kamala for dissolution of the firm.

6. If Kamala refused to accept the notice, Raju would apply for dissolution by a court order.

Issues

1. Is not the agreement expired on June 2010?

2. Can Kamala take a personal loan from bank by using firm’s financial status without the knowledge of Raju?

3. Can Raju apply for the dissolution of partnership?

4. Can Kamala assign the interest to bank business?

Presumptions

1. Partnership is expired in June 2010 (10 years completed). After that there was no partnership agreement but continued the business in their mutual understanding for an unspecified period.

2. Kamala used the firm’s financial status to take the loan from bank in their firm’s name for her personal use and was unable to pay installments. In order to repay the loan, she assigned her interest in the firm to bank business. She did all these things without the knowledge of Raju.

Rule / Ratio (reasons for decision) of cases or provisions in Contract Act

Since the partnership agreement was expired in June 2010, the firm had no agreement. In the absence of partnership agreement, the partners’ rights are as follows;

1. Partnership act 1961 sec 26 (a) says that every partner is entitled to equal share of capital and profit and losses of the firm.

2. Sec 26 (b) says that every partner who made any payment and incurred personal liabilities in the course of the firm’s business is entitled to be indemnified by the firm. The example case is In the case of Kok Hok Leong & Anor v. Seow Kah Cheng & Anor.

3. Sec 26 (c) says that every partner who made any advance for the purpose of the firm's business, beyond the capital amount he subscribed, is entitled to 8% interest per annum.

4. Sec 26 (d) says that no partner is entitled to interest on capital before the ascertainment of profits. Example case is In Rishton v. Grissell.

5. Sec 26 (e) says that every partner may participate in the management of the firm. Example case is Kelly v. Tucker.

6. Sec 26 (f) says that no partner is entitled to remuneration for acting in the partnership business.

7. Sec 26 (g) says that no partner may introduce another (new) partner without the consent of other existing partners. Example case is Wong Peng Yuen v. Senanayake.

8. Sec 26 (h) says that the majority partners may decide any differences with consent of all the existing partners to ordinary matters of the firm. Example case is Tham Kok Cheong & Ors.

9. Sec 26 (i) says that the partnership books are to be kept at the place of partnership business, or at the principal place if there is more than one place of business. Example case is Gan Khuan v. Tan Jin Luan.

Obligations of Partners to Act in Utmost Good Faith

1. Sec 30 (a) says that every partner is obliged to render true accounts and full information on all things affecting the partnership. In the case Law v. Law (1904), a partner transferred part of his shares to another partner for £21,000. The partner who bought the shares knew that the partnership assets comprised securities and charges but concealed the facts from the partner's knowledge. The Court held that the partner who had the information must disclose it; otherwise the sale of the shares may be set aside.

2. Sec 30 (b) says that every partner who uses the partnership property, name or business connection, or involve in any transaction concerning the partnership, without the consent of other partners, must account to the firm for any secret profit or benefit derived by him. In the case of Pathirana v. Ariya Pathirana it was held that the profit gained by the defendant from the agency contract belonged to the firm because the defendant had used the firm’s goodwill to obtain the new contract before the partnership was dissolved.

3. Sec 30 (c) says that the obligation of a partner not to compete with the firm in business of the same nature without consent of the other partners. Thus, if a, partner opens a competing business without the consent of other partners, he must account for and render all profits made by him to the firm. In the case of Ass v. Benham it was held that other partners had no right to claim for the benefit since the ship building business was of a different nature from the ship-brokerage business.

Assignment of shares

Section 33(1) says that a partner may assign his share if there is no agreement among the partners prohibiting the assignment. However, the assignee is not entitled to interfere in the management of the partnership business or to require any accounts of the partnership transactions or to inspect the partnership books. The assignee is only entitled to receive the share of profits to which the assigning partner would be entitled.

In the case of Ong Kian Loo v. Hock Wah Trading Co. & Ors, the Court decided that Section 33(1) was applicable in this case. Ong was only an assignee to the share of his mother in the firm. Therefore, he had no right to interfere in the administration of the partnership including the right to inspect the partnership books.

Relationship of partners and outsiders (third parties)

The agency principle is significant in the relationship of partners to outsiders because a partner is an agent for the firm. When a partner carries out activities within the ordinary course of the partnership’s business, his act will bind the other partners, so long as he has the authority to act and does not act beyond the authority given.

Partner's Authority to Bind the Firm

Section 7 provides that every partner is an agent for the firm and other partners for the purpose of the business of partnership. This means any act done by a partner in the course of the partnership business binds the firm and other partners; unless the partner has no authority or is unauthorized to act for the firm; and the third party knows that the partner has no authority or does not know or believe him to be a partner.

Therefore, outsiders or third parties dealing with the partner may assume that the partner has the authority to do such acts usually done by partners in that particular kind of business. This is an implied authority of a partner as an agent for the firm. In the case of Chan King Yue v. Lee & Wong it was held that the act of borrowing money by the plaintiff’s husband was important for the firm’s continuous business. Therefore, the firm was liable.

Section 7 also provides that the partner who has no authority or is unauthorized to act for the firm will not bind the firm if the third party knows that the partner has no authority or does not know or believe him to be a partner. According to Section 8 an act or instrument relating to the business of the firm and done or executed in the firm’s name, or in any other manner showing an intention to bind the firm, by any person thereto authorized, whether a partner or not, is binding on the firm and all the partners. In the case of Hock Hin Chan v. Ng Kee Woo it was held that a partner in a firm had an implied authority to issue a bill of sale on behalf of other partners. Therefore, the bill of sale was valid and binding on the firm.

According to Section 9 says that a partner cannot misuse the trust given to him by the firm to make debt which is not connected with the firm's business. The partner who misuses the trust shall be personally liable unless he has been given the express authority to do as such.

Liability of Partners

Contractual Liability

According to Section 11 says “every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death, his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied but subject to the prior payment of his separate debts.” In the case of Osman b. Haji Mohamed Usop v. Chang Kang Swi it was held that the debt was a firm’s debt and was obtained for the purpose of partnership. The partners who signed the promissory note had acted for the firm and they were authorized to do so. Therefore, the firm or the six partners were liable. Section 11 provides joint liability of partners in matters concerning contracts entered into by the firm with third parties. The joint liability under this section means that every partner is liable for all debts and obligations of the firm.

Tortious Liability

Section 12 provides “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 therefore to the same extent as the partner so acting or omitting to act.” In the case of Hamlyn v. Houston & Co it was held that H, as the partner, had done illegitimately that which was part of his business to do legitimately. Hence, the firm was liable for his act.

Liability for improper use of trust property

Section 15 provides “If a partner, being a trustee, improperly employs trust property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein: Provided as follows: this section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust; and nothing in this section shall prevent trust money from being followed and recovered from the firm, if still in its possession or under its control.” In the case of Ex parte Heaton (1819) it was held that the money which had been misappropriated could not be recovered from the partnership property because the father had no knowledge of the breach of trust committed by his sons.

Liability for holding out

Section 16 say that a person who is not a partner of a firm may become liable for the firm’s debt if he represents himself or allow himself to be represented as a partner in the firm. He will therefore be liable like a partner to the persons who give credit to the firm. In the case of Re Buchanan & Co. it was held that if the holding out or representation is made without the knowledge or consent from the real partner, only the person holding out as a partner shall be liable to the third party acting in reliance of the representation.

Liability for criminal offences

Any partner who commits criminal offences shall be personally liable. Other partners shall not be liable unless there is evidence to prove their participation in the commission of the crime. In the case of Chung Shin Kian & Anor v. Pendakwaraya, two partners in a firm had used a trade name (“Texwood”) that belonged to another company on their products. There was no evidence to prove that the second appellant was involved in the crime, except as to become a partner in the business. Thus, the appeal of the second appellant was allowed.

Liability of incoming and outgoing partners

Section 19(1) says that a person who is admitted as a partner into a firm is not liable for liabilities incurred before he became a partner.

Application of rules to the facts

Since the partnership agreement was expired in June 2010, the firm had no agreement. In the absence of partnership agreement, the partners have are provided nine different rights. Within these rights there is no provision which says that the Kamala has right to assign her interest or share to bank business. However, sec 33 says that she can assign her rights to another business if there is no agreement which prohibits the assignment. This is the general rule.

However, the case is very different in the situation of this partnership. Kamala did not show the utmost good faith to her partner Raju. Kamala should not misuse the trust given to her. Kamala took a personal loan amounting to RM100,000 from Bank Business by using the firm’s financial status without the knowledge of Raju. Kamala later assigned her interest in the firm to Bank Business. According to the sec 30 she must account to the firm for the secret profit she gained.

She has acted beyond the authority given to her and she must be accountable to Raju and the firm. Although Kamala did not have authority to act in this way, the firm will bind with Bank Business presuming that Bank Business did know that the Kamala has no authority. Section 15 says that if a partner employs trust property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested.

Since Kamala has used the firm's financial status for personal gain which can lead to numerous tax and income implications that may eventually lead to a criminal offence or fraud against both partners of the firm. It is clear that any partner who commits criminal offences shall be personally liable. Therefore, she is liable for the act and do not have right to assign her interest in Expert Consultancy to Bank Business in this situation. And Raju has the right not to participate in such activities and thus has the right to have his name removed from the partnership.

Opinion

Kamala had not right to assign her interest in Expert Consultancy to Bank Business. Her use of the firm's financial status for personal gain can lead to numerous tax and income implications that may eventually lead to a criminal offence or fraud against both partners of the firm. Raju has the right not to participate in such activities and thus has the right to have his name removed from the partnership.

3.2 Part (b) Solution:

Rule / Ratio (reasons for decision) of cases or provisions in Contract Act

The dissolution of a partnership is the process during which the affairs of the partnership are wound up where the ongoing nature of the partnership relation terminates. The initial process where the partnership or the firm becomes dissolve. Dissolution can be done through court and without court order. In this case Raju can apply for the dissolution of partnership on several grounds which are through court and without court order. The facts, issues and presumptions for this section are given in part A.

Without Court’s intervention

(a) By mutual agreement.

Section 28 (1) says that as the relationship among the partners is governed by the agreement among themselves, partners may at any time choose to put an end to the partnership by mutual agreement. The example case is Syarikat Wing Heong Meat Product Sdn Bhd v Wing Heong Food Industries Sdn Bhd & Ors.

(b) By expiration of fixed term or adventure.

If a partnership had been formed for a fixed duration or a single venture, then the partnership will be dissolved upon the expiry of the fixed term or upon the completion of the venture. This is provided for in s.34 (1), the relevant part of which states, ‘… subject to any agreement between the partners, a partnership is dissolved:

(i) if entered into for a fixed term, by the expiration of that term;

(ii) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking …’

The example case is Sukhinderjit Singh Muker v Arumugam Deva Rajah. Ariffin Jaka J. says “provision in sub section 28(1) and 34(1) (c) are subject to any agreement between the partners.

Where a partnership has been formed for an undefined time, any partner may give notice to the others of his desire to dissolve the partnership. This is also provided for in s.34 (1) Partnership Act 1961, the relevant part of which states, ‘… if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership.’

Further, the section states that where the partnership is dissolved by notice, the dissolution is effective as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice.

In one case where a partner served a writ of summons on the other partner, the court held that the effective date of notice was the date of service of the writ on the other partner that was in the case of Ariff v Yeo and Anor (1990).

(d) By death of any partner.

The death of any partner will result in the dissolution of the partnership, unless the partnership agreement provides otherwise. This is stated in s.35 (1) of the Partnership Act 1961. The agreement that provided otherwise must have existed before the death of the partner. A new agreement among the surviving partners will not satisfy this requirement. The cases of Lee Choo

Yam Holdings Sdn Bhd & Ors v Khoo Yoke Wah & Ors (1990) and Chia Foon Tau and Anor v Lim Pey Lin (1997) illustrate this point.

(e) By the bankruptcy of any partner.

The bankruptcy of any partner will also result in the dissolution of the partnership unless the partnership agreement provides otherwise. This is also provided for in s.35 (1) Partnership Act 1961. In the case of Khoo Yoke Wah v Lee Choo Yam Holdings. Supreme Court dismissed the appeal and reiterated the death of a partner dissolves the partnership.

(f) By a charge on a partner’s share of the partnership property.

Where one partner charges his share of the partnership property for the payment of his separate debts, the other partners may dissolve the partnership. This is provided for in s.35 (2) Partnership Act 1961. In the case of Davies v Barlow. Held: an assignment by a partner of his share in the partnership assets, in circumstances amounting to bankruptcy brought an automatic dissolution of partnership.

(g) By supervening illegality.

This is provided for in s.36 Partnership Act 1961, which provides that a partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. English case of Hudgell Yeates & Co v Watson, English Court of Appeal held in certain circumstances a partnership may remain legal but association between the partners may become illegal. The partnership is dissolve by operation of law but reconstituted as partnership between parties who are not incapacitated.

Court Intervention

By s.37 of the Partnership Act 1961, a partner may apply to the court for dissolution of the partnership in six different situations. The power of the court under this section is entirely discretionary as the section states that the court may decree a dissolution. The various situations are as explained below.

(a) Insanity of a partner

Section 37(a) provides that when a partner is found to be a lunatic or is shown to be of permanently unsound mind, an application may be made to the court for a dissolution of the partnership. The application can be made not only by the other partners but also on behalf of the partner who is of unsound mind, by his committee, next friend or any person having title to intervene. In the case of Jones v Noy. Held: The permanent insanity of a partner is a ground for dissolution of partnership.

(b) Permanent incapacity

Section 37(b) provides that the court may also order a dissolution where one partner becomes, in any other way, permanently incapable of performing his part of the partnership contract. The application in such a case can only be made by the other partner. Thus, if A and B are partners in a hairdressing business and A suffers from permanent paralysis of his arms, B may apply to the court for a dissolution on this ground. Where there is a reasonable possibility that the incapacity is only of a temporary nature, the court will refuse to order dissolution. In the case of Whitwell v Arthur. Held. Permanent paralytic stroke of a partner is a ground for dissolution of partnership.

Section 37(c) provides that a partner may apply to the court for a dissolution of the partnership when another partner has been guilty of such misconduct as, in the opinion of the court is calculated to prejudicially affect the carrying on of the business, regard being had to the nature of the business. This may be illustrated by the case of Carmichael v Evans (1904). In this case, C and E were partners. C was convicted of travelling on the railway without a ticket with intent to defraud. It was held by the court that as the conviction was for dishonesty, it was calculated to be detrimental to the partnership business. In the case of Clifford v Timms (1908), where one of the partners was a director of an association which was a party to self-puffing advertisements. The court held that the other partner was entitled to an order of dissolution of the firm.

(d) Wilful or persistent breach

Section 37(d) provides that where one partner wilfully or persistently commits a breach of the partnership agreement or otherwise conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on business in partnership with him, then they (the other partners) may apply to the court for a dissolution.

This may be illustrated by the case of Cheeseman v Price (1865). In this case, the offending partner had failed to enter small sums of money received from customers into the accounts as he was required to do under the agreement. This had happened 17 times. The court held that there was persistent breach and ordered a dissolution.

(e) Carrying on the business at a loss

Section 37(e) provides that the court may order a dissolution if the business can only be carried on at a loss. It must be shown that there is no more possibility of making a profit. Where there is still some possibility that the business could be made profitable if more attention is given in the future, the court will not order a dissolution. In the case of Jennings v Baddeley. Held: Failed to make profit after exhausted all avenue, court may ordered partnership dissolution.

(f) Just and equitable ground

Section 37(f) provides that the court may order a dissolution of the partnership when the circumstances of the case are such that, in the opinion of the court, it is just and equitable to do so. An example of a situation where the court would consider it just and equitable to wind up the company is where the partners can no longer work together and have reached a deadlock. In the case of Re Yenidje Tobacco Co Ltd. Held. Court order dissolution of the company when the shareholder refused to communicate and the same principle were applicable to partnership.

Application of rules to the facts

There are three grounds that Raju could use by way of court’s order:

(1) Prejudicial conduct: Kamala uses of the firm's financial status for personal gain can lead to numerous tax and income implications that may eventually lead to a criminal offence or fraud against both partners of the firm. Therefore she is Raju can apply to the court for a dissolution of the partnership for the guilty of such misconduct because her misconduct will affect the carrying on of the business which may eventually lead to a loss. Therefore the section and relevant cases provided support this option.

(2) Wilful or persistent breach: Kamala wilfully commits a breach of the partnership agreement in a matter relating to the partnership business that it is not profitable for the Raju to carry on business in partnership. Kamala has offended her partner. Kamala misused the trust given, did not act in utmost good faith and has assigned her interest without the knowledge of Raju. Therefore the section and relevant cases provided support this option.

(3) Just and equitable ground: In this case the court may allow dissolution of partnership because it is just and equitable to wind up and the partners can no longer work together and the trust of partnership is lost. Therefore the section and relevant cases provided support this option.

Opinion

Raju can apply for the dissolution of partnership on several grounds. One of the partners is in the breach of the partnership contract due to the fact that she is using the firm's financial standing for personal gain, and not for the benefit of the partnership. The partnership contract is valid for 10 years, and considering that the Kamala's breach of contract occurred in 2010, and the firm was established in 2000, the contractual obligation of the partnership is close to the end if not expired it is depending on the month of the year. Raju can go for dissolution through court order if she refuses to terminate the contract. The section 37. c, d & f can be applied if Raju wants to go for court order.

4.0 References

Contracts Act 1950 (Malaysia). Retrieved October 01, 2014, from http://www.agc.gov.my/Akta/Vol.%203/Act%20136.pdf

Dr Rahman, R. A. (2011). Business Law. Malaysia: Meteor Doc. Sdn. Bhd.

Partnership Act 1961 (Malaysia). Retrieved October 01, 2014, from http://www.google.mv/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CBsQFjAA&url=http%3A%2F%2Fwww.agc.gov.my%2FAkta%2FVol.%25203%2FAct%2520135.pdf&ei=PW43VPz1MMSOuAT3m4LIAQ&usg=AFQjCNFwfkdqn_GI3k5iCcQGsF6S2evdKQ

5.0 Case Laws

Arif v Yeo & Anor [1990] 1 MLJ 218

Ass v. Benham [1891] 2 Ch 244

Atwood v. Small (1838)

Bisset v Wilkinson [1927] AC 177

Caparo Industries pIc v Dickman [1990] 2 AC 605

Carmichael v Evans [1904] 1 Ch 486

Chan King Yue v. Lee & Wong [1962] 28 MLJ 379

CHEESEMAN v PRICE [1865] 35 Beav

Chia Foon Tau v Lim Pey Lin [1998] 7 MLJ 762

Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ 246

Chye Chew & Anor v. Eastern. Mining & Metals Co. Ltd [1965] 1 MLJ 201

Clifford v Timms [1908] AC 12

Davies v Barlow

Derry v Peek (1889) 5 T.L.R. 625

Edgington v Fitzmaurice (1885) 29 Ch D 459

Ex parte Heaton (1819) Buck 386

Flight v Booth (1834) 1 31 ER 1160

Gan Khuan v Tan Jin Luan [1939] MLJ 286

Hamlyn v. Houston & Co [1903] 2 KB 82

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223

Horsfall v Thomas [1862] 1 H&C 90

Howard Marine v Ogden [1978] QB 574

Hudgell Yeates & Co v Watson [1978] QB 451

Jacobs v. Revell[1900] 2 Ch 858

Jennings v Baddeley (1856) 3 K&J 78

Jones v. Noy, 2 My. & K. 12s (Eng. 1833)

Keates v The Earl of Cadogan (1851) 10 CB 591

Kelly v Tucker - [1907] HCA 40

Kheng Chwee Lian v Wong Tak Thong [1983]2 MLJ 320

Khoo Yoke Wah vs. Lee Choo Yam Holding Bhd [1991] 1 MLJ 414

King, R v (1986) CA

Kok Hok Leong & Anor v. Seow Kah Cheng & Anor (1950) 16 MLJ 87

Law v. Law (1904) All ER 526

Lee Choo Yam Holdings Sdn Bhd & Ors V Khoo Yoke Wah & Ors (19901 2 Mlj) 431

Letchemy Arumugam v. Annamalay [1982] 2 MLJ 198

Ong Kian Loo v. Hock Wah Trading Co. & Ors [1990] 1 MLJ 315

Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924) 4 FMSLR 292

PALANIAPPA CHETTIAR V. RAMASAMI GOUNDER & ANR [2001] RD-SC 221

Pathirana v. Ariya Pathirana [1967] 1 AC 233

Peek v Gurney (1873) LR 6 HL 377

Per Abdul Malik Ishak J. in Travelsight (M) Sdn Bhd & Anor v Atlas Corp Sdn Bhd [2003] 6 MLJ 658

Pertab Chunder Ghose v. Mohendra Purkait[1888-89] 16IA 233

Raffles v Wichelhaus (1864) 2 H & C 906

Re Brewer and Hankin's Contract (1899) 80 LT

Re Buchanan & Co. (1876) 4 QSCR 202

Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426

Rishton v Grissell (1868) LR 5 Eq 326

Sheikh Brothers Ltd. v. Ochsner [1957] AC

Skim Cepat Kaya and Kad Gores & Menang

Smith v. Chadwick (1884)

Sukhinderjit Singh Muker v. Arumugam Deva Rajah [1998] 2 CLJ

Syarikat Wing Heong Meat Product Sdn Bhd v Wing Heong Food Industries Sdn Bhd & Ors [2010] 7 MLJ 504

Syed Ahamed Alhabshee V. Putehis case

Tan Chye Chew & Anor v. Eastern. Mining & Metals Co. Ltd [1965] 1 MLJ 201

Tham Kok Cheong & Ors [1965] 31 MLJ 212

Whitwell v. Arthur 1865 beva 140

Wong Peng Yuen v Senanayake [1962] MLJ 204

Yeep Mooi v. Chu Chin Chua & Ors. [1981] 1 MLJ 14

Adam Khaleel

Sunday, December 20, 2015

Module Name: Business Law

Contents

1.0 Executive Summary

2.0 Question – 1.

2.1 Part (a) Solution:

2.2 Part (b) Solution:

3.0 Question – 2.

3.1 Part (a) Solution

3.2 Part (b) Solution:

4.0 References

5.0 Case Laws

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