Published 27 June 2016
The Supreme Court of New South Wales ruled that partners to a franchise coffee shop were not required to spend the same amount of time working in the business because of the method and terms used to distribute the profits.
Wang, Zhang and Rong entered into a partnership and opened a franchise coffee shop known as “Gloria Jeans Roselands”.
Wang and Zhang claimed that Rong breached the written Partnership Agreement and sought a ruling from the Court on the following issues in regards to the party’s obligations under the Partnership Agreement.
Significantly, the written agreement was prepared by an accountant with no legal training. The accountant used an internet precedent to prepare the agreement which was not suited to the partnership.
The first issue was whether Wang and Zhang were entitled to 50% of the profits of the Partnership and whether Rong was entitled to the remaining 50% of the profits of the Partnership.
The Court found this issue should be answered in the affirmative due to the clear wording of the Partnership Agreement (being “each partner shall be entitled to 50% of the net profits of the business”).
The second and third issue was whether Wang was entitled to a salary of $30,000 per annum plus $20,000 per annum for business expenses, and whether Rong was entitled to a salary of $50,000 per annum.
The Court highlighted that under the Partnership Act and the general principles surrounding partnerships, partners are not entitled to salaries. However, where there is express provision for this in a written partnership agreement it will be allowed.
The Court found this should be answered affirmatively. However, the Court noted that if the total partnership profit was less than $100,000, each partner would be required to contribute capital equal to the shortfall.
The fourth issue was whether the payments of $30,000 in salary and $20,000 in business contribution to Wang and $50,000 in salary to Rong were to be credited against the 50% share of the profits of the partnership.
The Court ruled the salary described in the Partnership Agreement was not meant as a salary, in the meaning of compensation for work done. Rather, salary referred to the “special distributions of the partnership’s profit”. Thus, where the total partnership profit was equal to or greater than $100,000, the ‘salary’ of Wang and Rong was to be credited against the 50% share of profits.
The fifth issue was whether Wang was entitled to his salary of $30,000 and the $20,000 for business expenses if he did not work 2 to 3 days per week at the business of the partnership.
The Court noted there was no term in the Partnership Agreement requiring each partner to work a certain number of hours in the partnership business. Therefore, the fiduciary duty imposed through the partnership would “oblige all partners equally to devote all of the time reasonably necessary to effectively conduct the partnership’s business.”
However, the Court found the use of the term “wages” and “salary” in the Agreement meant the partners were not entitled to their salary if they did not devote a reasonably necessary amount of time to the business.
Further, the Court found that because Rong received a salary of $50,000 when Wang received a salary of $30,000 plus a $20,000 business contribution, Wang was only required to work 3/5 of the time Rong worked to receive his salary. He was not required to work 2 to 3 days per week unless this amounted to 3/5 of the time worked by Rong as there was no mention of any required work hours.
However, as the $20,000 did not form part of Wang’s salary, he was entitled to receive this regardless of whether or not he met his obligations to work in the business.
The last issue was whether Wang, Rong and Zhang were jointly and severely liable for the debts of the Partnership.
The Court ruled the three partners were jointly and severely liable due to their Partnership.