BLAW504 Business Law

What is the legal position of Steve? Is he liable for breach of contract against Volvo Trucks (Australia) Ltd and Thor Mining Machinery Limited?

Applicable Law

No person in Australia can carry on any kind of business in the form of an incorporation unless the same is registered as per the norms mentioned by the government and must comply with the provisions of the Corporation Act 2001.

When a company is duly registered, then, it is given the status of an artificial legal person in law.  In the leading case of (Salomon v A Salomon and Co Ltd, 1897), it was rightly held that once a company is formulated it is distinct from its members. The acts of the members are the acts of the company and will bind the company. The company is liable to honor such acts and is bound by the contractual relationships that are established by the members on behalf of the company. In (Lee v Lee's Air Farming Ltd , 1960) submits that a company is separate legal person and thus a person can be shareholder and employee of the company at the same time. (Gillies, 2004)

It is submitted that if any contracts are made by the directors of the company on behalf of the company and of such contracts are nor honor by the company at the later stage, then, there is breach of the contract on the part of the company and the outsider is permitted to sue the company for the breach of contract and sue for damages and is held in ( Airloom Holdings Pty Ltd v Thales Australia Ltd, 2011)

The person who normally carries out all the functions for the establishment and incorporation of a company is called the promoter of the company. The promoter many a times makes contracts with the third parties even before the formation of the company. Such contracts are considered as pre registration contracts.  

Normally, when pre registration contracts are established by the promoter of the company and the third parties, then, such contracts have no enforceability value unless the same are ratified by the company upon its registration. The company can disregard the presence of the pre registration contracts on the basis that such contracts are made before the existence of the company, which is an artificial legal person in law, and thus no contract can be made with a person who is not yet created. But, the third party has the right to sue the promoter for the contract hat was established by him and can make him personally liable and is held in (Kelner v Baxter , 1866). (Tomasic, Bottomley, & McQueen, 2002)

In order to curb this menace, Section 131 -133 of the Corporation Act 2001 is incorporated. The law submits that the pre registration contracts are considered to be valid and can be enforced alginate the company provided the company ratifies the contract after the incorporation of the company. Sections 131 – 133 of the Act are only applicable to those e contracts which are formulated before the incorporation of the company and not after that. Thus, section 131-133 has no applicability on that company which is registered when the contract was made but later alters their names and is held in (Commonwealth Bank of Australia v Australian Solar information Pty. Ltd, 1987). (Teacher, 2018)

Application of Law

As per the facts, Steve Jones was a businessman. He got the information that in Western Australia there are gold deposits and he wants to encash the opportunity. On 6^th July he made a contract with Thor Mining Machinery Ltd (THOR) wherein he agreed to buy a drilling machine fro $125,000 on behalf of WA Gold Exploration Ltd. as per the contract that the drill must be delivered and the price will be paid on 30^th July.

It is submitted that Steve has made a contract on behalf of WA Gold Exploration Ltd (company), but, the company  was not established when the contract was formulated by Steve. The Company was registered by ASIC only on 10^th July which is after the formation of contract amid Steve and THOR. So the contract that was made was a pre registration contract. So, such a contract has no relevance unless the same was ratified by the company. 

On 25rth July, the registered company established that the company would not purchase the drilling machine from Thor, rather, they are buying the machine from United Mining Machinery Ltd for $ 100 000. The communication of the termination of contract was made to Thor.

It is submitted that the new registered company has no ratified the pre registration contract made amid Thor and Steve. Thus, as per section 131, the contract is not enforceable against the company. But, as per (Kelner v Baxter , 1866), Steve is personally liable to make good the los that is sustained by Thor. Steve is having personal assets of $ 1 million and thus his personal assts must be used to compensate Thor for the loss sustained by it.

Now,

Also, in the new company Steve was holding 90% shares but he was not the part of board of directors of the company. the board on 14^th July established a contract with Volvo Trucks (Australia) Ltd wherein they are purchasing trucks for $ 500 000 which are to be delivered on 30^th September. Later the company faces financial crunch and thus only had $ 400 000 in assets and had accumulated $ 2 million in liabilities and thus cancelled the contract with Volvo.

It is submitted that as per (Salomon v A Salomon and Co Ltd, 1897), the contract made amid Volvo and WA are the contract that was made by WA in its personal capacity. Also WA is an artificial legal person and has the power to make contracts. Thus, no shareholder or any other officer can be held personally liable for the liabilities of WA. So, Steve cannot be held liable for the liabilities that are generated by Volvo against WA as Steve is a shareholder and is distinct from the company (WA).

Conclusion

So, Steve can be held liable to Thor personally as the contract with it was a pre registration contract. But, Steve is not liable to Volvo as the contract was made by WA and Steve.

Issue

1. Consider the validity of contract between Simon and Sunstar Computer Hardware Limited upon Computer Solutions?
2. Consider the validity of contract between Simon and You Beaut UTE Ltd upon Computer Solutions?

Applicable Law

There is no one form in which a person can carry out his business activities in Australia. A business can be operated in the form of a trust, company or a partnership. One of the significant manners in which a business can be operated in Australia is by way of a partnership.

A partnership is nothing but an association which is established between two or more than two person who join together t carry on an activity on the continuous basis and the reason for the carrying on of such activity is to earn profit and share the same. So, the main elements of partnership include: (Egert, 2007)

1. Two or more persons;
2. Carrying on business of continuous nature;

• Share profit and losses.

When any partnership is established then the partners are the agents and the representative of each other and the partnership firm itself.

Generally, every partner of the firm makes several contractual relationships on behalf of the partnership firm and the same are binding on the partners and the firm. It is however, necessary that the contractual relationship must be carried on by such partner within the authority that is assumed by him through the partnership agreement. Many a times, the partner carries out his partnership obligations but exceeds his authority and make contract with the third parties. in such situations, the contract can be avoided by the partnership firm on the basis that the partner does not have the required authority and thus the contract is not binding on the firm on account of lack of authority.

But, in order to protect the position of the third party, it was held that if the outsider can prove that the contract that was established by him with the partner (who does not has the required authority) is made by the third party in good faith and with no knowledge that the partner does not have the required authority and with a belief that the partner does possess the required authority which is required to establish the contract, then, such contracts are  considered to be valid and is binding on the partnership form and all the partners of the firm ( Australian Capital Television Pty Ltd v Minister for Transport and Communications , 1989). This position is governed under the Indoor Management Rule that was established in the leading case of (Royal British Bank v Turquand , 1856). (Woodward E. , 2001)

The outsider is not require to inquire whether the partner with whom he is dealing has the authority or not. If the third party has honest belief and has reasonable reasons to believe that the partner has authority then any contract with such partner is binding and is held in (Bank of New Zealand v Fiberi Pty Ltd , 1994). But, as per (Northside Developments Pty Ltd v Registrar-General , 1990) if the third party is in the knowledge of the truth that the partner does not have the required authority and intentionally keeping himself in dark then the third party is not acting honestly and the contract is not binding in nature. (Krawitz A. , 2002)

Application of Law

There were four friends, that is, Simon, George, Sara and Mary who are employed by different IT companies. But, all the four intend to establish a business of their own. In order to establish the business, all the four pooled in cash and a partnership agreement was established. The Partnership agreements were called as Computer Solutions wherein all the partners are given their respective authorities.  The terms of the agreement specifies that all the four partners of the firm have the authority to make contracts on behalf of the firm provided the contract must not exceed the value of $ 10,000. But, if any partner intend to make a contract beyond such price the it is necessary that an approval must be taken by all the partners.

Issue i.

Simon bought a 50TB hard-drive from Sunstar Computer Hardware Ltd, costing $ 15 000.

It is submitted that as per the partnership agreement all the partners are authority to make contracts on behalf of Computer Solutions up to an amount $10,000. But, the contract that was made by Simon with Sunstar Computer Hardware Ltd is for $15,000 which is in excess of $10,000.

Thus, Computer Solutions can refuse to comply with the contract and pay the money by stating that Simon does not have the authority to make a contract, but, Sunstar Computer Hardware Ltd can prove that it is of the belief that Simon has the required authority to bind Computer Solutions and that their acts are carried on with honest belief then as per (Royal British Bank v Turquand , 1856), the contract is binding amid Computer Solution and Sunstar Computer Hardware Ltd.

Issue ii

Simon also purchased a second-hand ute, costing $ 9 000 from You Beaut Ute Ltd. it is submitted that the purchase by Simon was of $ 9,000 to which an actual authority was granted to Simon by all the other partners of the firm and trough the partnership agreement.

Thus, the contract with You Beaut UTE is valid irrespective of the fact to which the contract is concerned with.

Conclusion

The contract with Simon and Sunstar Computer Hardware Limited is valid as the same can be proved by applying the Indoor Management Rule. Also, the contract amid Simon and You Beaut UTE Ltd is also valid as the same is within the actual authority of Simon.

References

Airloom Holdings Pty Ltd v Thales Australia Ltd (2011).

Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989).

Bank of New Zealand v Fiberi Pty Ltd (1994).

Commonwealth Bank of Australia v Australian Solar information Pty. Ltd (1987).

Egert, G. (2007). Defining a Partnership: The Traditional Approach. Bond Law Review .

Gillies, P. (2004). Business Law. Australia: Federation Press.

Kelner v Baxter (1866).

Krawitz, A. (2002). Protecting Outsiders to Corporate Contracts in Australia - Volume 9, Number 3 . Murdoch University Electronic Journal of Law. 

Lee v Lee's Air Farming Ltd (1960).

Northside Developments Pty Ltd v Registrar-General (1990).

Royal British Bank v Turquand (1856).

Salomon v A Salomon and Co Ltd (1897).

Teacher, T. L. (2018). Common law discuss that the pre-registration contract. Retrieved September 10, 2018, from https://www.lawteacher.net/free-law-essays/company-law/common-law-discuss-that-the-pre-registration-contract-company-law-essay.php#ftn11

Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations Law in Australia. Federation Press.

Woodward, E. (2001). Corporations Law - IN principle. Australia: LawbookCo.5th edition.