Two mates gambling on horse races – constitute a partnership?
Background of the matter
Judgement was given on 24 July 2020 by Bowskill J in the Queensland Supreme Court as to the question of whether two mates gambling on horse races constituted a partnership for taxation and legal purposes.
In 2013, the plaintiff and defendant entered into an arrangement to gamble on horse racing together using a suite of computer software. Each was responsible for creating and maintaining different components of software.
For a number of years, the defendant had been involved in using different prior iterations of the suite of software in combination with various others to bet on horse racing.
The relationship between the plaintiff and defendant broke down in 2016 and their collaboration ceased. The defendant continued to use the suite of software until late 2017.
Claim by plaintiff
Over the period from 2013 to 2016, profits were shared between the plaintiff and the defendant. The plaintiff alleged that his arrangement with the defendant was a partnership. He argued that the software was an asset of the partnership and sought, inter alia, an award of $870,000 as his share of the partnership business. The issue before the Court was whether the arrangement was properly characterised as a partnership.
If a partnership were deemed to exist then, under the relevant partnership laws:
- when the partnership dissolved, the assets (being the software in this case), should have been sold and the proceeds paid to the partners;
- as the defendant continued to use the partnership assets after the dissolution of the partnership and make money, the plaintiff may have been able to claim a portion of the money made from the partnership assets as profits.
Court considered what constituted a partnership at law
Under s 5(1) Partnership Act 1891, a partnership “is the relation which subsists between persons carrying on a business in common with a view of profit”. Justice Bowskill noted that a “partnership is essentially a contractual relationship”.
The proper approach to deciding whether partnership exists in a particular case requires the Court to:
“… decide whether there was a binding contract between the parties involving the conduct of a business in common with a view to making a profit. The question is ultimately one of law. Where, as in this case, there is no written agreement, the task of determining the characterisation, as a matter of law, of the commercial relationship between [the plaintiff and the defendant], involves an examination of their words and conduct, with a view to objectively ascertaining their intentions as a matter of reasonable inference from their actions. The labels the parties may have used … is not determinative.”
Was this a gambling business partnership?
Although this case came “close to the line”, in her Honour’s view the gambling activities could not be characterised as carrying on a business.
This question was an objective question of fact and degree. The better view was that the parties had not been carrying on a business due to:
- the absence of any business activity other than betting;
- “the intrusion of chance into the activity as a predominant ingredient”;
- and, “the informal nature of the arrangement”.
This was despite the “systemised and organised way” in which the activities were conducted.
In any event, if this conclusion were wrong, Bowskill J considered that the parties would not have been carrying on a business “in common” within the meaning of s 5 of the Partnership Act 1891, such that there was a partnership. Her Honour concluded that the relationship lacked “the requisite mutuality of rights and obligations” necessary for it to bear “the indicia or hallmarks of a partnership”.
What were some of the important aspects of this decision by the court?
The following aspects of the relationship were influential in this conclusion:
- the defendant brought to the arrangement an established system and the software he contributed could not have been considered partnership property;
- the plaintiff took over labour intensive aspects of the system that the defendant no longer wished to do and recreated software components that former associates of the defendant had been responsible for, being remunerated for this work with a share of the profits;
- the work of the plaintiff and defendant was separate although it did contribute to the system;
- there was no contractual obligation to continue doing the work and arrangements for sharing winnings were reached on an ad hoc basis from time to time;
- the plaintiff was subordinate to the defendant rather than being an equal partner;
- with some exceptions, expenses were borne by the defendant rather than shared; and
- the contemporaneous exchanges gave “the very real impression” that the arrangement was not a partnership.
The relationship here involved the sharing of either gross returns, or profits. Pursuant to ss 6(1)(b) and 6(1)(c) of the Partnership Act 1891, this was not conclusive of a partnership existing. In her Honour’s view, the arrangement could not be characterised as a partnership. It was better characterised as a “wagering syndicate agreement”. In any event, the plaintiff’s case was pleaded solely on the basis of the existence of a partnership.
In the result, the plaintiff’s claim was dismissed.
Takeaway points
What does and does not constitute a partnership often weighs on the particular facts and circumstances of the arrangement between parties.
Simply because you think you are operating in a partnership, does not necessarily mean that you are operating in a partnership. Conversely, simply because you think you are not operating in a partnership does not necessarily mean that you are not operating in a partnership.
Before embarking on any relationship of this kind, particularly where money is involved, it is best to seek legal advice.
Disclaimer
This is general guidance only and not legal advice. You should seek legal advice and not rely on this information sheet when making any decision. Your particular circumstances might be very different.
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