Firstly, it is important to establish from what perspective you need to advise.
1. The first step is to identify the legal problem:
the legal problem in this scenario pertains to whether Mpho has breached any duty relating to his
6+relationship with his other business partners in the context of a partnership contractual
relationship. If so, do the partners have any remedy against Mpho in terms of applicable South
African law?
2. Law/application
As per Pezzutto v Dreyer and others the court held that partners are contractually bound to each
other and create the business relationship by means of a contract, where general requirements for a
valid contract are met and the essentialia for this specific contract is present.
A partnership is considered to be a contract uberrimae fidei- that is, a contract of utmost good faith.
This means that the relationship between the partners must be based on mutual trust and utmost
confidence.
- The fiduciary relationship among partners creates rights and duties which each partner has
to observe towards the partnership or other partners (given the implications of the
aggregate theory followed in South Africa.
In acting in good faith, one of the duties that a partner has is the duty to acquire benefits for
the partnership: since the partners owe a fiduciary duty to their fellow partners, they may
not acquire or retain any benefit or advantage that falls within the scope of the business of
the partnership. It is the duty of that partner to acquire such benefits or advantage for the
partnership.
Mpho has violated the spirit of a fiduciary relationship by acquiring for himself a benefit or business
which fell within the scope of the partnership business.
Mpho was on a business trip to Israel and instead of acquiring Superior Christmas tree seeds for the
partnership business, he sought to acquire this benefit for himself instead. This amounts to a breach
of a partner’s duty to acquire benefits for and to promote the best interests of the partnership
business.
- Partners also have a duty to guard against a conflict of interest- a partner should not place
themselves in a position where a prime interest of the partner may conflict with the duties
that the partner holds towards the partnership. If so, then the fiduciary relationship is
breached.
The fact that Mpho returned with superior seeds and started a similar business which competed with
his partnership’s Christmas trees business was conflict of interest.
, Another issue is whether there are any possible remedies available to Jimalo and Kentse against
Mpho:
- A breach of duties by partners will give the affected partners a right to seek remedies before
the courts.
One such action is the action pro socio which is a personal action which enables a court of
law to decide whether parties had performed their obligations in accordance with the
requirements of good faith (bona fides). This remedy is something akin to specific
performance as seen in Robson v Theron.
o The action may be instituted by a partner against a co-partner during the existence
of the partnership for specific performance in terms of the partnership agreement
and/or fulfilment of personal obligations arising out of the partnership agreement
and business.
- Affected persons may also approach the court to seek a court order to terminate the
partnership relationship on good cause shown, for example where one partner has
destroyed other partners’ confidence and made any possibility of contribution of the
partnership impossible.
- The court can order the partner who had acquired a benefit himself, which benefit fell within
the scope of the partnership business, to transfer the benefit to the partnership business.
3. Conclusion
In this scenario, the partners are entitled to approach a court of law in an action pro socio in which
they can request the court to grant specific performance for Mpho to cease competing against the
partnership business and to transfer the benefit which he acquired from his sole proprietorship
business to the partnership business.
The transfer of benefits may also include the transfer of any profits that Mpho could have acquired
as a result of the sole proprietorship business up to the point of the court case.
The partners, if they feel that the relationship of confidence and trust has irretrievably broken down,
can apply for a court order to dissolve or terminate the partnership for a good cause shown.
QUESTION 2
The scenario deals with close corporations.
Section 54 of the Close Corporations Act is relevant. Is states that every member of the Close
Corporation qualifies to act as an agent of the business for all purposes.
- Section 54(1) provides that any act of a member shall bind the close corporation, whether
such an act is performed for the carrying on of the business of the corporation, unless the
member so acting has in fact no power to act for the corporation in the particular matter.
- The relevant case law is J & K Timbers (Pty) Ltd v G L & S Furniture Enterprises CC in which
the court confirmed that a member is an agent of the corporation.
The court further confirmed that the existence of a resolution or unanimous consent of all
members is not a prerequisite to a close corporation being bound to a third party by one of
the members.
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