Question
In October 2009 Steve a gifted race horse trainer bought Lightning Spirit from an Adelaide Hills horse breeder. Lightning Spirit was a six month old
In October 2009 Steve a gifted race horse trainer bought "Lightning Spirit" from an Adelaide Hills horse breeder. Lightning Spirit was a six month old horse that showed great strength and speed on the paddocks where it was brought up. Steve paid the breeder RM300,000 for the horse.
However, to successfully train the horse and participate in the big and lucrative races Steve required more funds. In early 2010 he met with Joe and Mike, two old friends he knew from High School. Steve told Joe and Mike about the potential of Lightning Spirit and of his financial and logistical problems to train the horse for the big races.
Joe and Mike had recently made some money on the stock markets became quickly interested in entering into a venture with Steve. Hence, Steve proposed the following deal:
-Joe and Mike would each pay $200,000 for a 1/3 share in Lightning Spirit;
-Steve would train the horse for the big races without receiving any monetary compensation;
-Joe would provide the training facilities on his farm (stables and training track) free of charge;
-Mike would use his contacts to engage the best jockeys and to facilitate starts in the big races;
-All issues regarding racing the horse would be discussed together and decision taken by majority;
-Any prize money won would be used to pay for expenses (e.g. fodder, transport and starting fees);
At the end of 2011 Lightning Spirit should be sold and the profits shared equally. All three of them agreed to this by handshake although Joe and Mike did not know how much Steve had paid for Lightning Spirit.
In 2011 Lightning Spirit confirmed Steve's intuition and became an overnight sensation when winning the Adelaide Cup and subsequent races. In December 2011 the Sheik of Brunei offered RM2.4 million for Lightning Spirit, an offer Steve, Joe and Mike could not resist. They sold the horse and shared the profit.
By coincidence Joe got to know the breeder of Lightning Spirit at a cocktail party. After some small talk about business and horse racing, the breeder said to Joe: "I guess we should have charged Steve more than $300,000 for Lightning Spirit, shouldn't we?" Joe tried not to show his surprise and simply said "I guess so". The next day he talks to Mike who also feels let down by Steve.
Advise Joe and Mike whether they are in partnership with Steve.
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