Court of Appeal takes broad approach to business partnerships

This was confirmed by the New Zealand Court of Appeal in December last year in Zheng v Deng.

We look at the decision.

Context

Mr Zheng and Mr Deng entered into the Orient Partnership in 2004, although without any formal documentation. The two men used the Orient Partnership as the basis for a number of joint property development and construction projects over a ten year period.

In 2008, Mr Zheng and Mr Deng drew up a particular agreement to fund a construction project: the Bella Vista Agreement. Its title was subsequently translated from Mandarin as a “partnership agreement”, or a “cooperation” agreement.¹ The Bella Vista Agreement was signed by Mr Zheng alone, though Mr Zheng claimed that he signed it on behalf of himself and Mr Deng.

Due to financial strain, brought on in part by the Global Financial Crisis, Mr Deng and Mr Zheng agreed to separate their affairs from 31 May 2015, and drafted a “Principles in Separation” document.  

The key issue on appeal was whether or not Mr Zheng and Mr Deng had entered into a legal partnership, such that they were jointly responsible for the debts of the partnership.

Findings

The Court of Appeal found that Mr Zheng and Mr Deng were in a partnership as they carried on business in common with a view to profit,² contributing equally to it and sharing equally in any profits or losses.³

It assigned little weight to the fact that Mr Zheng had signed the Bella Vista Agreement alone on behalf of the Orient Partnership as in partnerships, one partner can bind all the other partners.⁴

The Court cautioned against attributing any significance to the precise terms used in the English translations of the Bella Vista Agreement on the basis that these were prepared by different people at different times, and that they may not have understood the legal nuances of particular words and phrases.⁵ 

The Court found that, although the Principles of Separation document had not been finalised, both men had contributed to it and an equal sharing approach had been adopted.⁶

Key takeaways

The Court found that whether or not a partnership exists is a mixed question of fact and law, and is determined on the basis of “what the parties said and did”.⁷ In this case, there was no formal partnership agreement, no annual partnership financial statements, and no application to IRD for a GST number for a partnership. 

But the Court focused on the substance of the underlying business relationship, rather than the form, and expressly cautioned against drawing inferences based on preconceptions about “normal” or “appropriate” ways of structuring and recording business dealings.⁸

The Court was also sensitive to the importance of the social and cultural context that framed Mr Zheng and Mr Deng’s relationship, and referenced a recent report into cultural factors as a tool to understanding transactions between Chinese parties.⁹

Our thanks to Danae Wheeler for writing this Brief Counsel.

1 The Collins Chinese-English dictionary confirms that the term frequently used to refer to the parties’ overall business association in documents and email correspondence — 公司— can be variously translated as “company”, “firm” or “enterprise”.

2 The Partnership Act 1908, s 4(1); Zheng v Deng [2020] NZCA 614 at [97].

3 Zheng v Deng [2020] NZCA 614 at [97].

4 Partnership Act 1908, ss 8 and 9.

5 Zheng v Deng [2020] NZCA 614 at [86].

6 Zheng v Deng [2020] NZCA 614 at [102(b)].

7 Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA) at [51].

8 Zheng v Deng [2020] NZCA 614 at [89], [94] citing Roderick I’Anson Banks Lindley & Banks on Partnership (20th ed, Sweet & Maxwell, London, 2017) at [2-15].

9 Mai Chen “Culturally and Linguistically Diverse Parties in the Courts: A Chinese Case” Superdiversity Institute for Law, Policy and Business, 2019.