TEST 1

Question:

a) Labu, Labi and Laba are partners in a firm carrying on the business of food supplement
and healthcare under the name of Putih Putih Enterprise. The partnership is formed
based on mutual trust and confidence between them, after knowing each other since
childhood. One day, a customer, Appu who had bought the product known as “Vitamin
Gebu Putih”, a food supplement to whiten the skin, came to their office. She claimed
that she has suffered kidney malfunction due to the toxic content in the product. She
claimed that she was convinced by Labu that she must consume it for 3 months
consecutively to be effective. Labu was a minor. Appu is devastated and wishes to
bring legal action against the firm claiming RM1 million in damages.

Labi, who obtained a Bachelor Degree in Nutrition from the US, has set up a business of selling
Phentermine, a controlled drug to suppress hunger within 7 km radius from the existing place
of business. The other partners discovered this and want to account for all profits made by
Labi.

Laba, who has anger management issues always got into a fight with employees. One day, he
punched Tommy, a sales manager because he was unhappy with the low sales. Other partners
also want to expel Laba from the partnership. Tommy also received a portion of the profit
from the sales as per the employment contract between him and the Putih Putih Enterprise
and also seeking his rights under the partnership.

Laba is unhappy because he has no confidence in the firm’s direction and intends to dissolve
the partnership. He also wants to divide the partnership’s property equally.

With reference to the Partnership Act 1961 and decided cases, advise all parties on rights and
liabilities from the above.

(40 marks)

The End
Issue:

1. Whether the firm can be made liable against Labu’s act of selling to Appu the Vitamin Gebu
Putih which caused Appu suffered kidney malfunction.

Section 3 of Partnership Act 1961 defined partnership as a relationship that subsists

between persons carrying on business in common with the view of profit. Section 8 of the
same Act, the partners are bound by act on behalf of the firm so long the act must be done
for the purpose and in the ordinary nature of the partnership statute and the act must be
done by a partner of the firm in his capacity as a partner and not in his own personal
capacity. In the case of Hock Hin Chan v Ng Kee Woo, the court held that since one of the
partners has apparent authority to issue a bill of sale on behalf of the firm, all other partners
are bound on his act. In order for the third party to hold the partnership liable, the following
conditions must be met (a) the act must be done for the purpose and in ordinary nature of
the partnership; (b) act must be done by a partner of the firm in his capacity as partner and
not in his own personal capacity. In the case of Mercantile Credit Co Ltd v Garrod (1962),
the court held that the sale of the car was doing of “an act for carrying on in the usual way
business of a kind carried on by the firm” to the plaintiff. The firm was accordingly bound.

Section 11 of the Contract Act 1950 states that anyone who is legal capacity is capable of
entering into a partnership agreement whereas a person who becomes a partner should
have the capacity to contract. A minor can enter into a partnership with an adult. However,
a minor cannot incur or be responsible for any contractual liability for the firm’s debts. They
only can be made liable for debts which are legally enforceable against them which would
be for their necessaries. In the cases of Goode v. Harrison (1821), the court held that an
infant (minor) may be in partnership but not liable for a contract entered during his minor.
If he continues with the partnership when he comes of the age, he will then be liable as a
partner and if he dissolves the partnership, and if, when of age, then he will cease to be a
partner. In the case of William Jacks & Co (Malaya) v Chan & Yong Trading Co, the plaintiff
claimed against the defendants the sum of $12734.91 for goods sold and delivered by the
plaintiff to the defendants. Chan and Yong (minor) were sued as partners of the defendant
firm. The court held that the fact that Yong made use of the goods bought from the plaintiff
for his own purpose did not mean the partnership and consequently the partners were not
liable. By virtue of Section 12 of the Partnership Act 1961, in order to make a firm liable,
the tortious act must be committed by a partner either in the ordinary course of the
business of the firm or with the authority of his co-partners.
 In the present case, Labu indeed is a partner although he is minor. Labu advises Appu to
take the “Vitamin Gebu Putih” to whiten the skin is indeed the act of selling their firm’s
product under the capacity of the partnership. This act is in the ordinary course of the
business of the firm or with the authority of his co-partners. In view of the above law and
cases, Appu may take action against the firm in the result of Labu’s conduct against him.
The act of Labu within the act of ordinary business, hence, the partner will be made liable.
However, Labu maybe not personally liable but the firm Putih Putih Enterprise will be made
liable.

The firm Putih Putih Enterprise will be made liable by the act of Labu.

2. Whether Labu and Laba can claim over a profit made by the Labi’s other business.

According to Section 31 of the Partnership Act 1961, partners are bound to render true
accounts and full information of all things affecting the partnership to any partner or his
legal representatives. Section 32 of the same Act states that a partner may not enter into
any business that competes with that other firm. However, if the nature of the business is
not similar, the firm cannot sue for any private profit in virtue of Section 31 whereby a
partner is not prevented from keeping any profits made from transactions that are entirely
outside the scope of the partnership. A partner who runs a private business will be liable to
account for the profits that he makes if the business of the same nature and competing
with the firm’s business. This means that if it is the same, but it is not competing it will not
be against Section 32. So where the business is not in competition with the partnership
business, the person will generally not be liable to account to his co-partners for any profits
he has made from such business. If the business is similar, the same business that is
competing must be carried on without the express or implied consent of the other partners.
The intention of Section 32 is to prevent a partner from having a conflict of duty as a partner
with his own private interest. Whether a business is in competition with a partnership is a
question of fact, which will depend on the scope of the business. In Trimble v Goldberg
(1906), Goldberg, Trimble and Bennett were partners in a business of buying and reselling
certain properties belonging to a Mr Hollard. The properties are shares in Sygma Syndicate,
and plots of land in Johannesburg and other places in South Africa. While carrying on the
business for the firm, Trimble bought for himself and Bennett some plots of land from
Sigma Syndicate. Upon discovering this fact, Goldberg sued Trimble to claim the benefit
from the purchase. The Privy Council held that Goldberg’s action failed because the
purchase was not in competition with the firm’s business.
 In this present case, Labi has set up a business of selling Phentermine, a controlled drug to
suppress hunger within 7 km radius from the existing place of business. Labi’s own product
is under the category of food supplement and healthcare which is similar to Putih Putih
Enterprise products. Hence the scope of business is similar and caused conflict of interest.

In virtue of Section 32 of the Partnership Act, Labi has breached the authority. Hence, Labu
and Laba can claim a profit made by the Labi’s other business.

3. Whether Tommy can be a partner if he receives portion of the profits from the sales as per
employment contract.

A partnership need not have to be created by a formal deed or written agreement. It may
be created orally or in writing. Thus the definition of partnership in Section 3 (1) of the PA
1961 for a partnership to exist, two or more persons must be ‘carrying on business in
common.’ Section 4 of the PA 1961 lays down the circumstances in which there are NO
prima facie partnerships. (a) Joint tenancy, tenancy in common, joint property, common
property, or part ownership (b) The sharing of gross returns (c) The receipt by a person of
a share of the profits of business is prima facie evidence that he is partner in the business,
but the receipt such a share, or of a payment contingent on or varying with the profits of a
business does not of itself make him a partner in the business; and in particular. Section
4(c)(2) of the Partnership Act 1961 stated a person cannot be a partnership if received a
profit in virtue of employment. This rule allows a servant or agent to take part in any project
where they have a share of the profits, but they are not liable as a partner. 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.

In the case of Walker v Hirsch (1884), the plaintiff who is a former clerk of the firm agreed
to advance $1500 to the firm and that the loan shall be repaid by payment of a salary $180
and one-eight from the net profits. The court decided that in itself did not make him a
partner, thus he had no rights as a partner.

Another case to refer is in Abdul Gaffor v Mohamad Kassim (1931-32) whereby the plaintiff
was a servant of the defendant. He had signed an agreement where he was allocated shares
that had been apportioned between him and the defendant and others. He claimed that
 this document proved that he was a partner of the business, and as such is entitled to a
certain share of the profits. The defendant denied that there was a partnership and said
that the relationship between them and the plaintiff was that of employer and employee.
The court held that on the true construction of the facts, there was no partnership. The
relationship between them was that as employer-employee.

By applying law into the fact, based on the authority and cited case, Tommy is not a partner
because he only received a portion of the profit.

In conclusion, a person who received a certain portion from partnership not make him a
partner.

4. Whether Laba can dissolve the partnership if he has no confidence with the firm’s
direction and divide the property equally.

Dissolution of a partnership may happen in various circumstances. A partnership may be

terminated/ dissolved by way of agreement. If the duration of the partnership has been
specified in the partnership agreement, the partnership is terminated on the expiry of that
period or if the partners mutually agree to dissolve the partnership. Section 34(1)(c) of the
PA 1961 states that if the partnership was entered into for an undefined time, by any
partner giving notice to the other partner(s) of his intention to determine (or end) the
partnership.

In the case of Sukhinderjit Singh Muker v Arumugam Deva Rajah (1998), the plaintiff and
the defendant were partners in a legal firm named “Loveland & Hasting”. When a dispute
arose between them, the plaintiff through a letter gave notice of his intention to dissolve
the partnership (as quoted from the letter ‘...I hereby give notice of dissolution of the
partnership as from 31.7.97…”). One of the questions raised before the court was whether
the partnership was effectively and properly dissolved. The court held that as in the
circumstances the defendant has failed to prove that there was an implied agreement
between the plaintiff and the defendant that the partnership could not be dissolved by
notice by the plaintiff, the partnership was effectively dissolved.

Section 37(e) of the PA 1961: When the business of the partnership can only be carried on
at a loss. In the case of Handyside v Campbell(1901), the plaintiff, a partner in a firm,
applied to the court for a decree of dissolution of partnership on the ground that the
partnership could only be carried on at a loss. The other partners, however, argued that it
 was still possible to make a profit if proper attention were given. They alleged that the loss
suffered at present was partially due to the plaintiff’s past mismanagement, and partially
due to his long absence from the business because of his illness, and that his absence still
continued. It was held that the court refused to grant an order of dissolution of the
partnership because there was no proof of the practical impossibility of making a profit.

In the present case, Laba has no confidence in the firm’s direction due to the firm’s low
sales and intends to dissolve the partnership. There is no mentioned about a specified
agreement. Hence, If there is a partnership agreement between them, and the duration of
the partnership is specified in the agreement, the partnership is terminated upon the expiry
of that period. Nonetheless, if there is no partnership agreement, Laba may propose to
terminate the partnership by giving notice to the other partners of his intention to dissolve
the partnership.

In conclusion, Laba can dissolve the partnership and divide the partnership’s property
equally as he has no confidence in the firm’s direction.

5. Whether Laba can be expelled from the partnership due to his anger management issue.

According to Section 27 of the Partnership Act 1961, the majority of the partners cannot
expel any partner unless a power to do so has been conferred by express agreement
between the parties. If a partnership agreement provides that a partner may be expelled
for breach of certain specified articles, the other partners can only exercise the power in
good faith. In Green v Howell (1910), a clause in a partnership agreement provided that if
a partner committed any flagrant breach of his duties as a partner, the other partner could
expel him but subject to an appeal to an arbitrator. One partner was guilty of a flagrant
breach of his duties as a partner. The other partner, acting in good faith, served a notice of
expulsion on him without giving him an opportunity to explain. The question was whether
the notice was a valid one. The Court of Appeal held that it was a valid notice. The notice
was in accordance with the provision in the agreement. In the case of Karen Isabel Wilfred
v. Dhyana Shila Vasanthan (2014), a notice of dissolution issued by the defendant to the
plaintiff to exit from the partnership and to dissolve the firm. It held that Section 27 allows
the majority in the partnership to expel any partner, provided that the power to do so is
expressly conferred by the partnership agreement. The power to expel could only be
exercised if there was an express provision in the partnership agreement to allow the same.
In the present case, Laba has anger management issues and always got into a fight with the
firm’s employees. Labu and Labi not happy with this unhealthy environment and wish to
expel Laba from the partnership. By referring to the above authorities and cited cases, a
partner cannot expel another partner from the partnership even if a majority wants him to
leave unless a power to do so has been conferred by express agreement between the
partnership.

In conclusion, Labu and Labi cannot expel Laba from the partnership even though Laba has
management issues unless a power to do so has been conferred by express agreement
between their partnership.