Comm 7012 : Business And Assessment Answers

1). Steve Jones is an entrepreneur with a variety of business interests. He learned of a gold deposit in Western Australia. Because he was anxious to exploit the opportunity, he flew to Perth and on 6 July and entered into a contract to buy a drilling machine from Thor Mining Machinery Ltd, to be used to drill a test shaft. The contract specified that the drill would be delivered, and payment of the $ 125 000 price would fall due, on 30 July. He signed the contract as follows:

Steve Jones, on behalf of WA Gold Exploration Ltd.

WA Gold Exploration Ltd was registered as a company by ASIC on 10 July, with Steve as 90% shareholder. He and the other shareholders met on 11 July, to elect a board of five directors. Steve himself was not elected to the board, because although he had originally discovered the opportunity, he had no experience in mining operations, and so did not want to be a director.

On 14 July, the board signed a contract with for a fleet of five ore trucks from Volvo Trucks (Australia) Ltd, costing a total of $ 500 000, to be delivered on 30 September. The board also established a sub-committee to determine the company’s technical needs, and on 25 July the board accepted the committee’s recommendation that the company buy a drill from United Mining Machinery Ltd for $ 100 000. The board also contacted Thor Mining Machinery Ltd and told it that it would not be taking delivery of the drill.

Unfortunately, in mid-September it became clear that the gold deposit was not as large as hoped, and the board ceased trading on the basis that the company had only $ 400 000 in assets and had accumulated $ 2 million in liabilities. The company is therefore unable to pay for the trucks.

Steve, who has personal assets of $ 1 million, has now been sued for breach of contract by both Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd. Assume you are his legal advisor. Prepare advice for him citing full legal authority, as to what his legal position is.

2). Simon, George, Sara and Mary were all employed by different IT companies. However, they felt that they could do better if they went into business themselves. They pooled their available cash and drew up a partnership agreement, which stated that each partner had authority to enter into transactions on behalf of their firm, which they called Computer Solutions. The firm operates in Sydney and provides a service of storing data for customers. The agreement states that partners have authority to enter into contracts of up to $ 10 000, but that any contract for more than that must be approved unanimously by all partners.

George, Sara and Mary approach you for legal advice in relation to two transactions entered into by George, who had acted without referring back to the partners.

One was for a 50TB hard-drive, bought by Simon on behalf of Computer Solutions, from Sunstar Computer Hardware Ltd, costing $ 15 000.

The other was for a second-hand ute, costing $ 9 000, which Simon ordered for the firm from You Beaut Ute Ltd, on the basis that the partnership should branch into the freight business – an idea that the other partners had previously rejected.

The issue which was involved in this case is what the legal position of Steve is in this case and whether Steve is personally liable for acting on behalf of the company.

Relevant laws

The issues can be solved by discussing the relevant business and corporation laws regarding this issue. The law related to contract entered into before registration in Australia, The Corporation Act 2001 decides the liability of a person who has entered into a contract on behalf of a company. It is provided under Section 131 of the Corporations Act 2001 that a contract made before the registration of the company shall be enforceable against the company if it ratifies the contract within a reasonable time. It further provides that if the company is not registered or the contract is not ratified after its registration, the person will be liable to pay damages for breach of a contract. Whereas, the Section 1.5.1 of the Corporations Act 2001 provides that, a company is a separate legal entity. A contract entered into by a company can be enforceable by or against them. If they do not perform their part of the contract they can be sued for causing breach of contract. It was decided that upon incorporation, a company shall be considered as a new legal entity in the case of Salomon v Salomon & Co [1897] AC 22.

Application

In this case, there is two transaction. One is by Steve Jones with Thor Mining Machinery Ltd and another is by the board with Volvo Trucks (Australia) Ltd. When Steve Jones entered into the contract to buy drill from Thor Mining Machinery Ltd, the company was not registered. According to Section 131 of the Corporations Act 2001, Steve shall not be bound to pay any damages if WA Gold exploration Ltd ratifies the contract within a reasonable time after its registration. As the company did not ratify the pre-registration contract, Steve shall be liable to pay damages for causing breach of the contract. While, the contract with Volvo Trucks (Australia) Ltd, was entered into by the board of the WA Gold Exploration Ltd. According to the Corporations Act 2001 a company is liable to pay out the money for its contract. As the company is a separate legal entity, Steve cannot be personally liable to pay the money which was promised to be paid to Volvo Trucks (Australia) ltd by the company. The liability to pay the $500000 belongs to the WA Gold Exploration Ltd, Steve cannot be sued for causing breach of contract and his personal assets are not exposed to any liability. It has been provided under the Section 1.5.1 of the Corporations Act 2001 the director of a company can be held liable for the debts incurred by the company, when the company is unable to pay those debts. As Steve was not a director of the company, his personal assets are not the liability of the company.

Conclusion:

From the above discussion it can be concluded that, Steve is liable only for causing breach of contract to Thor Mining Machinery Ltd. He cannot be held liable for paying the cost to Volvo Trucks (Australia) Ltd.

2

Issues

The issue which is involved in the case is whether Simon can be held liable for those two transaction which has been mentioned in the case.

Relevant laws

The act of George was bound by the Partnership Act 1963 as he was one of the partners of the firm. The law related to partnership as provided under the Act states that partners of are the agent of the firm and the other partners. Any act which is done by the partner in the ordinary course of business shall bind the firm and the other partners. However, any firm shall not be liable for the act of a partner who has acted without the consent or authority. It is required that partners acts with the consent of others and does not wilfully conduct in a way to make the firm liable for his act.

Application

In this case, Simon had entered in the partnership with the other three parties. It is the fiduciary responsibility of the partners of a firm to act with the consent of others. Any partner who is not authorised to do any act, must refrain from doing that. It was agreed by the partners that they will not enter into a contract exceeding $10000 without the unanimous approve by the other partners. Simon had breached this term and bought the hard drive costing $15000. It is the responsibility of Simon to pay the money to Sunstar Computer Hardware Ltd. It can be assumed that he had bought the hard drive on his single capacity. Additionally, the partners had previously rejected the idea to start a freight business. Simon without referring back to others. As per Section 9 of Partnership Act of 1963, the partnership would have been affected by the act of Simon only if he had acted within his authority. The act of ordering the second hand ute cannot bind the firm as he was not authorised to so. A mischief act of any partner to bind the firm should not be entertained by the firm. He did not acted within the ordinary course of his business while making these two transactions. Hence, it is not the joint liability of the other partners.

Conclusion:

Therefore, it can be observed from the above discussion that, the partnership shall not be liable for the transaction that Simon made acting beyond his authority.

Reference:

Goulding, S. (2018). Principles of Company Law. 3rd ed. Cavendish Publishing Limited.

Legislation.gov.au, , 2018, <https://www.legislation.gov.au/Details/C2018C00031> [accessed 7 September 2018].

Partnership Act 1963.