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It is becoming increasingly difficult to ignore the fact that partnership in business presupposes a certain credit of trust among partners. Partnership often involves an ability of action on behalf of each other, but such aspect does not necessarily involve a contractual agreement between parties. At the same time, many business entities employ other firms or single individuals in order to act on their behalf, thereby promoting partnership by estoppel when it is limited only to de facto obligations. Such practice often results in harms to third parties, as employed individuals or business entities consider that all responsibility will be directed to the original employer. However, a statement “wherever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss must sustain it” is evidently relevant in terms of the existing practice of corporate law and is in fact practiced in accordance with the Partnership Act 1892. It is an evidently complicated law, which is why it requires a profound explanation. The following paper provides an account of estoppel partnership and the Partnership Act 1892 and explains their main peculiarities.
Definition and Requirements
Before discussing the issue, it is necessary to be explicit about what is meant by a term of partnership by estoppel. As a matter of fact, it is a form of partnership, in which one or more entities/individuals are presented as an employed representative of the independent partner de facto; meanwhile, no legal confirmation of partnership can be present. Thus, acting on behalf of a certain entity and subsequent harming a third party makes a factual partner liable to charges and law enforcements, provided that the third party proves the credibility of harms made and reasons the belief that a defendant was in a partnership with a particular business entity (New South Wales Consolidated Acts, n.d.). Taking these points into account, it should be noted that the Partnership Act 1892 protects the rights of third parties that become victims of actions caused by estoppel partnership of business owners, who in their good faith enabled certain subordinates or other firms to act on their behalf. That is why the main requirements to enforcing the Partnership Act 1892 are the following:
- Evidence of factual partnership between two or more business entities or particular individuals relevant to the moment/prior to the making harm to a third party (New South Wales Consolidated Acts, n.d.);
- An approved presence of the claim that the harm has been made to a third party and that the third party was aware of their rights’ violation;
- A distinct presentation of harm made by at least one representative of estoppel partnership and proof that this harm was in fact made by a defendant (New South Wales Consolidated Acts, n.d.);
- Distinguishing of a business owner’s confirmed permission for a defendant to act on behalf of the company.
Focusing on the essence of partnership by estoppel, first of all, it is necessary to admit that its main requirement is rather debatable. The issue of determining the evidence of one individual or business entity being in a partnership with the other one is obviously complicated, especially when a third party brings a claim of harm made by one of estoppel partners (Painter,1962 – 1963). It is becoming increasingly apparent that one or more partners expose a certain evidence of being in a partnership with each other for a particular reason, so that the analysis of that reason is also a strong factor in a final ruling and making of a court decision (Baxt, Fletcher, & Fridman, 2009). A nature of that reason can identify intentions of both estoppel partners, hence, a case of unintentional harm can be also present (Painter,1962 – 1963). For instance, a third party company claims that two other organizations with estoppel partnership harm its revenues owing to the fact that their consolidated performance exposes a competitive pressure (Emerson, 2009). Thus, such claim cannot become a subject to estoppel partnership legislation, since the law does not recognize that as a violation of rights and these partners may a hold a partnership not only on a de facto but also de jure basis.
Hence, it is fair to say that the identification of a partnership evidence is not a matter of fact but of the law. Unfortunately, a contemporary court practice of partnership by estoppel and holding out often revolves around claims of defendant’s being liable to a third party charge and a third’s party presentation of harm made by an estoppel partnership (Emerson, 2009). It is no surprise that such ruling of proceedings does not rely on the Partnership Act 1892 to the fullest extent. Such practice, however, does not deny the fact that the Partnership Act 1892 requires a distinct and proved evidence of estoppel partnership as well as a clear presentation of justified harms made by the partnership as a whole or by any representatives of this partnership.
In addition, the case of Brocato v. Serio suggests such a statement “…But it must appear that the person dealing with the firm believed and had a reasonable right to believe that the party he seeks to hold as a partner was a member of the firm, and that the credit was to some extent induced by this belief, and the holding out must have been by the authority or with the knowledge of the party sought to be charged” (2016). Therefore, any actions taken as a representation or evident partnership become a subject to the Partnership Act 1892, as long as a person or business entity used a benefit of being in partnership for specific purposes that violate the rights of a third party (Painter,1962 – 1963). Nonetheless, such a statement is not ultimate and universal as well, provided that specific circumstances of claiming someone to be a partner may involve a positive purpose.
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In such a way, some firms may intentionally expose an evidence of estoppel partnership in order to place the emphasis on the significance of this partner or make a public announcement that this party is involved in a business of a company for advertising, or even warning purposes. At any rate, a fact of any intentional exposure of estoppel partnership does not necessarily mean a direct harm to a third party (Levenson, 1963 – 1964). This evidence is not a subject to any liability, but any actions taken by at least one representative of a claimed estoppel partnership can be recognized as a subject to the related legal liability, charges, and other responsibilities (Levenson, 1963 – 1964). That is the reason why it is fair to say that estoppel partnership itself is not illegal, but its factual and proved use for specific benefits and consequent harms to a third party is a subject to liabilities described above.
The Partnership Act 1892 is also applicable to cases of estoppel partnership, when a certain representative of a firm or any other business entity takes loans, credits, or conducts any actions on behalf of this firm (Todd, 2007). In the event of a third party being harmed (in such cases, it is a bank), the firm will be liable and charged according to a respective law enforcement, even though its representative himself/herself made harm to a third party (Levenson, 1963 – 1964). Such aspect can be explained by the fact that the firm as an employer neglected its primary function and provided the rights of authority to a single individual with a low rate of trust (Todd, 2007). In other words, it is the firm’s fault that it enables its subordinates with such a freedom of acting on behalf of the entire entity. Beyond a doubt, a representative of the firm is also liable to charges and further law enforcement.
On the contrary, the firm is not liable to any charges and law enforcements in the event of fictional exposure of partnership by the firm representative. For example, a certain firm’s employee forgets a document or any other legal evidence of being allowed to act on behalf of the company (Carey & Cilella, 1934 – 1935). Hence, such cases are not a subject to the Partnership Act 1892 in a sense of estoppel partnership. A person is only a liable identity in that regard, and he/she will expectedly be charged by a third party as well as by a company that employs him/her. It is informative to note that both scenarios of permitted and prohibited acts on behalf of a business entity requires a strong evidence that a certain person or other business entity was in the factual partnership at the moment of making harm to a third party (Carey & Cilella, 1934 – 1935). A common practice suggests that third parties may claim their harm after quite a long period after the factual harm being made, so that the provision of reliable facts regarding estoppel partnership or holding out should be present.
On a separate note, it is worth saying that a principle of partnership by estoppel may work in an opposite way. A representative of a company, with which an evidence of estoppel partnership is present, may claim that there is no partnership in the factual as well as legal sense (Carey & Cilella, 1934 – 1935). Again, in case a firm that employs a person or other company is quite aware of such evidence, both representatives of “cloaked” partnership are liable to charges and law enforcement (Duruigbo, 2010). Provided that an employer is not aware of actions made by its partner, this entity is not liable to charges and law enforcement. Duruigbo admits that “owners of improperly formed LLCs should enjoy limited liability protection when such investors, in good faith, believe that an LLC had been formed or where there have been dealings on the basis that an LLC is a party” (2010), as the owner was quite aware of the consequences for the third party and can be potentially proved to have such initial intent.
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However, a common practice also suggests that such form of implied estoppel partnership is practiced by large corporations and their LLC subsidiaries, so that the absence of relationship de jure makes particular benefits for both entities or eliminates any liability of a maternal corporation (Fletcher, 2007). It is hard to argue that the absence of any legal evidence of partnership does not necessarily mean that such partnership cannot be confirmed (Redmond, 2009). That is why the Partnership Act 1892 is applicable in such cases, as long as de facto partnership and intentional preservation of this evidence are a subject to other law enforcements. However, the Partnership Act 1892 establishes a foundational ruling of such cases to a subsequent proceeding under related corporate laws.
It is appropriate to make a general comment on the fact that partnership by estoppel and holding out is ruled in accordance with the Partnership Act 1892. The paper has identified the essence of this law and explained its peculiarities. In such a way, estoppel partnership is a form of partnership that does not employ a legal agreement, but actions of one or more entities can be recognized as acting on behalf of the entities that have conclude a partnership. Therefore, making harm to any third party makes representatives of estoppel partnership liable, provided that a third party proves their belief in the existence of this partnership and harms made by its representatives. Nevertheless, estoppel partnership itself is not recognized as a violation of a third party’s right, once the exposure of evidence that some individual or business entity is a partner does not render any direct harm. Furthermore, cases of acting on behalf of a certain business entity without its awareness and approval is a subject to a defendant’s liability only. Similarly, the intentional preservation of estoppel partnership is also a subject to the Partnership Act 1892, as it presents a fundamental reasoning for the further legal proceeding on a case.
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