Three sisters, X, Y and Z, jointly inherit a small apartment building valued at $2.1 million. The building produces only a modest rental income.

X and Y believe the apartment building could be more profitably utilized as a hotel. They dream of becoming hoteliers.

Z is a medical doctor. She has no dreams of becoming a hotelier and is perfectly happy being a one third owner of an apartment building producing a modest rental income.

X and Y press Z to venture the apartment building in a hotel business. Z, the good sister, with great reluctance eventually agrees to go along with the plan. But subject to conditions. First, she will not be involved in any way in the hotel business other than to supply capital. Second, X and Y alone shall bear any losses that might arise from the hotel business.

On January 1, X, Y and Z enter into an agreement entitled ‘Partnership Agreement.’ The agreement contains, inter alia, the following provisions.

• X, Y and Z shall be partners in a hotel business with effect from January 1
• the firm shall trade under the name Capital Hotel
• each partner shall make a capital contribution being her interest in the apartment building plus $35,000
• X and Y are to be active partners and devote their full-time and attention to the conduct of the hotel business
• Z is to be a sleeping partner
• annual profits of the business are to be first shared among the partners equally (33.3/33.3/33.3) up to an amount equal to 10% of capital contributed. Profit beyond this figure is to be shared equally between X and Y (50/50)
• any loss is to be borne equally by X and Y (50/50)
• each of the two active partners is to have full authority to act on behalf of the firm

Following the signing of the agreement, the business name Capital Hotel is registered. Partners contribute capital as agreed. Planning approval is obtained to use the firm’s premises as a hotel. X and Y negotiate a loan to the firm by ANZ Bank. The apartment building is remodelled and turned into a hotel with 20 fairly basic guest rooms. On May 1, the hotel opens its doors and receives its first guests. X and Y adopt a business plan under which the hotel is to be gradually upgraded.

Answer the following questions. Give reasons in support of your answers and include reference to any relevant sections.

 (i) What is X’s capital contribution stated (measured) in dollars?                              

(ii)   The partners X and Y are active partners. The partnership agreement states that each has ‘full authority to act on behalf of the firm’. Does this mean that the firm will be bound by any contract made by X (or any contract made by Y)? Suppose, for example, X contracts on behalf of the firm to buy a gold mine. Will the firm be bound by the contract? Explain you answer fully.                                                                                                              

(iii)  Z’s only role in the firm is to supply capital. Suppose Z contracts on behalf of the firm (using firm business paper) to purchase 20 air conditioners from Cool Air Co Ltd (‘Coolco’). Will Coolco have a binding contract with the firm? Explain your answer fully.