Running a commercial venture


Tom, who is close to retirement age, is a farmer who wishes to introduce another party to help him with running a commercial venture. Tom expressly wishes for the parties to be joint venturers rather than partners.

Accordingly, Tom enters into a joint venture agreement with Jones who is an agricultural scientist and wants to develop new grain products. Both parties also agree orally that each party is liable for the debts of the business based upon their respective share of profits (of which, 60% is distributed to Tom and 40% to Jones. They also agree that each party will arrange their own tax affairs.

After 6 months, the business starts to decline with the drought driving up the level of business debt. Due to the financial impact of the Global Financial Crisis, Tom has virtually no assets outside the business whereas Jones is wealthy having made a fortune on biotechnology stocks, now worth about $1 million. Jones purchased the biotechnology stocks for his family trust, of which he is the trustee and his wife and three children (Ben, Lee and Ida) are the beneficiaries. FarmBank Ltd has lent the business $500,000 and is concerned about recovery of its business loan. FarmBank Ltd is keen to pursue the personal assets of Jones to make up any shortfall in the repayment of the business loan and wishes to access the valuable biotechnology stocks as part of its loan recovery strategy.

(1) Advise Jones as to his potential liability and exposure to paying more than 40% of the debts. Your answer must be supported by legal reasoning and relevant precedents and must discuss the loan recovery strategy proposed by FarmBank Ltd.(pls analyse the partnership but not joint venture)

(2) Assume that Sandy, a grain exporter, had an accident on the farm run by Tom and Jones. Whilst visiting the farm to inspect farm product, Sandy tripped over some agricultural machinery that Jones left on footpath and sustained severe head injuries, resulting in hospitalisation and major medical and rehabilitation expenses.

(a) Advise Sandy as to whom she can sue for compensation and the legal reasons for your answer.(agency relationship and tort liability)

(b) Would your answer be different from Question 2(a) if Tom and Jones had agreed to share the gross proceeds of the farming product instead? Explain fully with the aid of relevant precedents (joint venture relationship)

(3) This question is independent of the questions above.

Assume the business conducted by Tom and Jones had also borrowed $250,000 from a firm of trustees, Perpetual Ltd. Due to the financial difficulties in the farming business, the business is assigned to Perpetual Ltd for the purpose of allowing the trustees to conduct the business until such time all the debts of the farming business are fully paid. Perpetual Ltd, in return, receives payment from the profits occasionally generated from the farming business. Tom had issued a cheque to pay SupplyCo Ltd for agricultural seeds supplied to the business. That cheque was subsequently dishonoured.

Advise SupplyCo Ltd if they can recover payment from Perpetual Ltd on the basis of partnership law. Your answer must be supported by legal reasoning and relevant precedents.

End of Question:

Hint: Your answer must address the relevant legal issues raised in this course. The question draws on selected material covered class in 1-4 and therefore no discussion on the law concerning directors’ duties, negligence or liability under the Australian Consumer Law is required.

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Business Law and Ethics: Running a commercial venture
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