Shaun and Craig are friends who are studying business at a university in Adelaide. They are both keen musicians and came up with an idea in November last year to start a business which offers online music lessons. Shaun and Craig have obtained an Australian Business Number (“ABN”) and registered In the first six months of operation, Shaun and Craig found it difficult to get many students to enrol in their lessons. They began operating out of Shaun’s Mum’s garage and this led to some negative feedback because Shaun’s Mum could sometimes be seen in the background unloading groceries from her car. This negative feedback was posted on Shaun’s personal Facebook page. In addition, online lessons were not as popular as they thought they would be and they received some inquires for some face to face lessons.
After this, Shaun and Craig discussed the possibility of renting a music studio and also offering face-to face lessons. Following this discussion, Shaun then decided to lease a music studio in a trendy inner city neighbourhood. Shaun entered into a formal lease agreement for three years. Only Shaun signed the lease. Shaun had borrowed $20,000 from his Dad to pay the rental bond as well as the first six months’ rent in advance.
When Craig saw the new studio he said: “oh … this is awesome” but didn’t ask anything about the lease or rent. The next day Craig, moved his collection of music instruments and equipment (worth approximately $25,000) to the studio.
The business started to grow slowly and fees were paid into a joint bank account. However a number of problems arose:
Shaun discovered that Craig had been doing a number of extra lessons outside the studio (at Craig’s home). Craig kept the fees from those lessons to himself. Shaun confronted Craig on this. Craig responded by saying: “You don’t own me, I can do what I want … All the fees from the business have been banked into the joint bank account, so what are you whinging about.”
Although the business experienced some modest growth, the fees earned are not enough to pay next month’s rent and electricity bill. Neither Shaun nor Craig have any money to meet these expenses.
One Tuesday afternoon, Shaun was giving a face to face guitar lesson to Ronnie, a school aged student. During the lesson Ronnie needed to stop for a bathroom break. Ronnie used the small bathroom in the studio. Unfortunately, the bathroom floor was covered with water and some kind of oily substance. Ronnie fell and bumped the side of his face and head on the toilet. Ronnie was knocked unconscious and taken to hospital via an ambulance. Ronnie is ok, but suffered a severe blow to the head and also broke his jaw. Ronnie needed to have a number of medical tests to make sure there was no permanent damage. Ronnie also had to undergo complicated surgery on his jaw. Shaun and Craig receive a letter from Ronnie’s lawyers informing them that they are being sued for $12,000. Shaun and Craig do not have any public liability insurance.
After all this, Craig decided that he no longer wanted to take part in the business. Craig met with Shaun at the studio and said:
“Sorry bro … but I am totally over this …. I am out.”
Shaun was furious and responded:
“You can’t do that, we have rent and bills to pay. I can’t cover these expenses without your help …. You can’t just quit!”
Craig ignored him and started loading music instruments and equipment into his van. While this was happening, Shaun yelled at Craig and said:
“that property belongs to the business, you can’t just take it!”
Craig continued to ignore Shaun, finished loading the equipment, made a rude gesture at Shaun and then drove off.
Based on this information, you need to use the IRAC method to answer each of these questions:
A. Does a partnership between Shaun and Craig exist? In the “A- Analysis/Application” part of
your answer, make arguments both for and against the existence of a partnership.
For questions B-F, you should assume that a partnerships does exist.
B. Can Craig leave the partnership in the way he did?
C. Is Craig entitled to the fees from the extra lessons he had been doing?
D. Are the music instruments and equipment partnership property?
E. Who is liable to pay the outstanding rent and electricity?
F. If Ronnie successfully sues Shaun and Craig, who is liable to pay that amount of money?
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