Product Invention

Adam, an electronic engineer, and Frank, a business consultant, have been childhood friends. In June 2016, Adam reached out to Frank with information about his new invention. Adam said, “I think I have a great product invention. But, I am an engineer and do not have the capabilities to raise funds and grow a business. How about we parter up and get this business off the ground together? We can achieve our childhood dream of becoming millionaires together!” Frank got excited about the new invention. However, he had several other consulting projects that he was supervising. So, he said; “I would be happy to help you as an old friend. But, I am very busy with my other projects and most probably won’t have any time to engage in running the business. I may be able to give my part-time attention to your business at best. Let’s start with me trying to use my contacts to raise some funds for you, and also to see if I can secure a grant from the government. We can wait to see how things move forward and then reassess things”. Adam agreed. He filled in a partnership agreement template, which was given to him by his lawyer a year before. Adam shared the agreement with Frank. However, being close friends, they never got to actually sign the document. They started their business endeavour by creating a joint bank account, in which each of them deposited $5,000 to cover the everyday expenses of the business. During the first year, each of them added another $5,000 to this account. In the course of the next 2 years, the business took off as Adam had predicted. Adam was successful in filing two valuable patents. Frank raised $100,000 from his network of investors. This was followed by securing a government grant of $400,000. These funds allowed the business to lease a workshop, hire 4 staff, and build two working prototypes by the end of 2018. During this time, Adam worked in the business on a full-time basis. He made all the key decisions, both financially and operationally. Frank, on the other hand, was rather busy with his own consulting work and showed up at the workshop once or twice a week to say hi and have a casual chat with Adam and the staff. Despite Frank’s lack of day-to-day presence at the workshop, Adam treated Frank with a lot of gratitude and respect; always saying that if it wasn’t because of Frank’s help in honing the initial business plan, using his network to raise funds, and completing the grant applications they would not be able to achieve anything. Adam even allocated one of the three rooms at the workshop to Frank, with a sign on the door reading: “Frank – General Partner”. Also, at times when they had visitors, Adam introduced Frank as his partner, to which Frank never made any complaint nor approval. By early 2019, things were moving in a great direction for the business as a giant Chinese tech holdings had reached out to Adam’s lawyer about the possibility of acquiring the business at the astonishing value of $10 million. However, as the negotiations were undergoing between the parties, this news found itself to an article published by an international business magazine. Following the publication, a tech company from the United States came forward with the claim that the technology behind Adam’s invention actually belonged to them and was acquired by Adam while he was working at their company as a mid-level engineer a decade before. Adam profusely rejected such claims. Nonetheless, the US company proceeded to sue Adam personally for breach of his contract (competition clause) and breach of his fiduciary duty. They also have sued Adam’s business for breach of their IP. After a 2-year legal battle and a hefty sum spent on the legal fees, Adam eventually lost the case. He was then able to reach a settlement in which requires him to pay $1 million to the US company. Adam has no money, only a small apartment valuing at around $400,000. He now believes that as his partner, Frank must pay half of the the settlement amount. Frank, however, has strongly rejected the idea, indicating that he has only been acting as a consultant to the business and owes no liability to it. Unfortunately, Adam and Frank’s friendship is in trouble and they no longer talk to each other. Adam has come to you as his new lawyer. Refer to the laws of partnership and provide him with advice with regards to his and Frank’s liabilities. 

Refer to the distributed scenario (Adam vs. Frank). With reference to the laws of partnership, discuss whether partnership exists and if yes what are the range of liabilities for the affected parties.

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