Law2480 Business And Corporations Law- Assessment Answers

Questions:

1. Elena was the owner of a beauty salon in North Melbourne. The salon was quite successful and had won a number of creative styling awards. In 2014, the salon had been featured by InStyle magazine and became a popular hot spot for fashion icons.

In early 2015, Elena's brother Ringo decided to develop a new shopping centre on the outskirts of Williamstown. Ringo's dream was to establish a fashion hub for elite brands. Impressed by the success of his sister's salon, Ringo decided to approach Elena to see if she would lease one of his ‘prime location' stores. He tells Elena that a number of big brands had already signed long-term leases, including a number of high-end fashion shops and a cinema, and that he would pay for her store to be ‘fitted-out'.

Elena, excited by the prospects of the development, agrees to a 5 year-lease at $3000 per week. The development was partially completed on 1 January 2016 and Elena's new store opened two weeks later. Although her store was in a prime location, she was disappointed to find that a number of the big brands promised by Ringo had not actually signed leases and that construction on the cinema was still another 12 months away.

With a lack of big brands, the shopping centre struggles to attract customers and a number of shopkeepers begin to leave. On 23 November 2016, Ringo publishes the following add in the Herald Sun:

Short time offer! Special rate of $1,500 per week for all businesses that sign a new 2-year lease at our Williamstown Shopping Centre.

On 24 November 2016, Elena reads the advertisement and is furious that she is paying double the amount offered in the newspaper. On the same day, she writes to Ringo demanding that he reduce her rent to $1,500 per week. On 27 November 2016, Ringo writes back to Elena stating that he could not reduce the rent of her premier store to $1,500, but instead would reduce the rent to $2,000 per week.

For the next 6 months, Elena pays the reduced rent. She uses the $1,000 saved each week to advertise and redecorate the salon. She also purchases a new massaging chair on credit (the credit was only available to Elena based on the stores reduced weekly expenditure).

The shopping centre continues to struggle, and Elena fed up with the lack of business, confides in her mother Maria that she is thinking of terminating the lease. Ringo hears from Maria that Elena is considering terminating her lease. Worried about his cash flow and the number of business leaving the centre, Ringo sues Elena to recover $6,000 that he claims is ‘rent in arrears'.

Using case law, advise Elena of the likelihood of Ringo's success.

2. Albert is a poorly educated immigrant who knows very little English. He owned and operated a small fruit orchard in the Kinglake ranges for over 40 years, and following the passing of his wife Maria, decided it was time to sell the orchard and move closer to his daughter Josephine in Essendon.

Josephine held a large parcel of land in Essendon, and upon hearing of her father's plans, offered Albert the opportunity to build a small unit at the back of her property. The only condition was that Albert would need to arrange and pay for the construction himself. Albert thought this was a perfect idea and told Josephine that he would start looking for a builder straightaway.

The next morning Albert met with his neighbour Steven at the Flying Tarts Bakery for a cup of coffee, where he told Steven about his plans. Steven was sad to hear that Albert was leaving Kinglake, but explained that his brother George owned a construction company and would be able to help. Steven made a quick phone call and advised Albert that George could meet with him on Sunday.

George visited Albert on the Sunday with a number of unit plans for Albert to look at. Overwhelmed by the number of plans, Albert asked George for his advice on which unit would suit him best, pointing out that he wanted something small and cheap. George responded, “ah, you cannot go past the Mirage unit plan. It is one our most popular designs, and not to mention our cheapest!' In fact, the Mirage was one of the most expensive options.

George knew that Albert could not read the contract, but insisted that he sign that day ‘to lock in the price'. Albert thought George looked trustworthy enough and proceeded to sign the contract without reading it. The contract provided that George would build one (1) unit to the specifications of the Mirage Unit plan for $250,000, payable upon completion of the project.

Construction commenced on the unit shortly after and the build went smoothly. The project was complete within a couple of months, from which time Albert moved into the unit. However, Albert was disappointed to find that the flooring was lopsided, resulting in the doors and cabinetry not closing properly. Small cracks were also appearing in the walls and some of the ceilings had begun to sag.

An upset Albert sought advice from an independent building consultancy firm, who explained that the concrete slab had been laid incorrectly and that it would cost $75,000 to fix. Albert was forced to rent an apartment at a cost of $300 per week while the repairs took place (he had already sold the orchard and Josephine did not have enough room in her house). Albert paid the consultancy firm $75,000 for the repairs, which took 3 months to complete.

Albert has now received an invoice from George for the full contract price ($250,000). Albert is very upset and refuses to pay George a cent. Albert has now come to you for advice.

Using case law, advise:

a) WhetherAlbert has any obligations to pay George; and,
b) Whether Albert would have access to any remedies under contract law.

3. Harry Harbinger operates a sole-trader computer software business that specialises in developing software applications for accountancy firms. Harry has dedicated the past 10 years growing his sole-trader business, but is beginning to find it difficult to attract new clients. The feedback he has received from recent demonstrations suggests that his product is out-dated and looks like something ‘straight out of the 90s.'

Harry decides that it is time to freshen up his product. He wants to hire a team of high-quality programmers and a physical space to develop his product, but understands that additional financial capital is required. Harry would also like to establish a side-business that specialises in the supply of computer products and hardware to complement his software business.

Harry attempts to borrow money from Seedy Bank, but is told that he does not have enough security for the amount required. Disappointed by this, Harry is considering raising capital by offering part-ownership in his business.

Harry has now come to your for advice on which business structure would best serve his purpose. He tells you that his biggest concern is retaining absolute control over the direction of the business, but that he would like to implement a structure that will attract and keep the right employees.

In your discussions with Harry, you discover that he is unmarried and has no living family.

Advise Harry of the potential ways to structure his business, including the strengths and weaknesses of each option for Harry's specific circumstances.

Answers

1. Issue

The key issue in this case relates to the success of Ringo in recovering the amount of $6,000 as rent in arrear from Elena.

Rule

Under the contract law, there are certain vitiating factors which make the contract void or voidable at the option of the aggrieved party. One of such vitiating factors is misrepresentation. Under misrepresentation, one of the parties is induced into formation of the contract by making a false statement of fact. Upon successfully establishing a case of misrepresentation, the aggrieved party can get the contract rescinded. Smith v Land and House Property Corp was a case where a hotel was bought by the claimant and the seller described a tenant as “the most desirable”. The statement was made by the claimant where he had clear knowledge that the rent of this tenant was unpaid and the tenant could be declared as bankrupt at any moment. It was held by the court that a case of misrepresentation was present here as the statement was one of fact and not of opinion. This was because the seller held a position where he knew these facts.

The difference between a statement of fact and statement of opinion can be clarified with the case of Bisset v Wilkinson. The respondent had made a statement in this regarding the possibility of the land holding 2,000 sheep. Making reliance on the statement made, claimant purchased the land and upon the estimate being proven wrong, a claim for misrepresentation was made before the court of law. It was held by the court that the statement made here was a statement of opinion and not of fact. Due to this reason, the claim of misrepresentation failed. Similarly, in Car & Universal Credit v Caldwell, due to the fraudulent misrepresentation being established before the court of law, the contract was permitted to be rescinded by Caldwell.

Amongst the different major concepts in contract law, is the concept of promissory estoppel. Under this concept, the individual who made a promise is stopped from making a u-turn on such promise, particularly where the second party made reliance over the promise made. So, once a promise is made, a person is estopped from going back on this promise, particularly when the same is not supported by consideration. The first requirement to establish a case of promissory estoppel is to show that a contract was in existence. Secondly, the obligation covered under this contract is modified. Thirdly, the promise was clear and unambiguous, which led to a change in the position of the parties. Lastly, if the promisor is allowed to go back, it would be unfair for the party who relied upon the made promise.

In the High Trees case, the promissory estoppel as a concept was brought forward through the obiter statement made by Lord Denning. The case revolved around the rent of block of flats given to the defendant by the plaintiff for ground rent of £2,500. Due to the defendant facing hardships as a result of the Second World War, it was decided between the parties to bring down the rent by half. Upon the war being over, the plaintiff asked for the original rent to be reinstated. The court agreed with the point raised by the plaintiff. Lord Denning did not stop the ruling here and made the obiter statement where he stated that had the plaintiff asked for the payment of the reduced rent, for the war period, they would have not succeeded. The rationale behind this was the reliance of the defendant on the promise which changed their positions, and ultimately, the concept of promissory estoppel came into being.

Application

The facts of the case highlight both the issues mentioned in the Rules segment. The case study clearly shows that Ringo had approached Elena in order to see her interest in the prime location store being offered by him. For inducing her into entering the lease for his store, Ringo told Elena that a number of brands had signed up long term leases and that high end fashion shops would be opened up along with the cinema. The last statement which induced Elena to the contract entering was that Ringo would be doing the fitouts for Elena which led to the formation of a five year lease at the price of $3,000 per week. It later came to Elena’s knowledge that the claims of Ringo and the statements made by him were false. Neither the brands had signed any lease nor was the cinema constructed yet. This allows a case of misrepresentation to be made by Elena against Ringo. In this regard, Elena can quote the case of Smith v Land and House Property Corp, where she could show that the statement made by Ringo was false and he was in a position to know the truth. This would clearly show that Ringo is liable for misrepresentation. Ringo can make an attempt and claim defense on the basis of Bisset v Wilkinson; however, this case would not prove to be much of help as the statement of fact was lied upon by Ringo and not of opinion. This would allow Elena to get the contract, i.e., the lease agreement rescinded on the basis of Car & Universal Credit v Caldwell.

The second fault of Ringo in this case lies in the doctrine of promissory estoppel. As soon as Ringo came to know that Elena was contemplating to terminate the lease, he made a claim for the reduced rent. However, here a promise was made on the basis of the preexisting contract, which changed the parties’ position. It was clear that the rent had to be decreased which was the change in position. If Ringo is allowed to claim the reduced rent, it would be unfair for Elena, especially because Ringo is already given the lease to new businesses for half the rates offered to Elena. On the basis of the obiter statement given in the High Trees case, Ringo would be estopped from going back on the promise which was made.

Conclusion

The discussion carried on above makes it very clear that Ringo would not be successful in recovering the amount of $6,000 as rent in arrear from Elena due to promissory estoppel. Further, his misrepresentation would allow Elena to get the contract rescinded.

2. Issue

The key issue in this case revolves around the obligation of Albert to pay up the promised amount to George. Further, the possibility of Albert claiming remedies pursuant to contract law is also an issue of this case.

Rule

Under any contract, two or more parties are involved, who come together and promise each other certain terms, where usually one party offers the consideration and the other offers the fulfillment of certain task. It is crucial that a contract has certain key elements, without with the contract cannot be formed. The elements include the elements of agreement, which is offer and acceptance, and the other elements like consideration, capacity, legality, intention and genuine consent.

Genuine consent shows that the parties, who are taking part in the contract formation, are doing it out of their free will and have not been forced in any manner. There are five different factors which can lead to an absence of genuine consent for a contract and included in these five factors are unconscionability, duress, misrepresentation, undue influence, and mistake.

In such cases where it can be established that a party had been put in a position where a special disadvantage was caused to them due to their position being weaker in comparison to the dominating position of the other party, a case of unconscionability can be made by the party who was at such disadvantageous position owing to their illness, financial condition, ignorance, impaired facilities or inexperience. In order to make a successful claim of unconscionability, there is a need to establish that the party in dominating position had the clear knowledge about the disability of the weaker party. Further, it also needs to be shown that the dominating party knew that there was an opportunity present which would allow them to take advantage in contract formation with such weaker party. So, unconscionability allows the weaker party is taken unfair advantage of, by the dominating party. Upon a case of unconscionability being successfully presented in the court, the weaker party has the option of getting the contract being brought to an end.

A leading example of unconscionability was established in Commercial Bank of Australia v Amadio. The plaintiff had guaranteed the business debts of the elderly Italian migrant couple’s son. During the execution of the mortgage, the previous financial position of the son was known to the bank manager, along with the fact that the defendant was not a proper English speaker. Even then, the bank never informed the defendant about their son’s position and the entire situation was also not explained to them. Further, the bank chose to ignore to tell the defendant to seek independent advice. All these reasons led to the court holding a successful case of unconscionability based the conduct of the plaintiff.

There are different manners, in which any contract can be discharged, and amongst these is the contract being terminated. In such a case where the promise made under the contract is not fulfilled by one of the contracting parties, the non-breaching party gets the option of claiming damages from the breaching party for not fulfilling their side of the promise, made under the contract. The damages can be in form of monetary compensation or equitable remedies.

Application

The facts of the case highlight the presence of elements of unconscionability in George’s conduct. This is clear from the fact that George was fully aware of the knowledge of English of Albert was very poor and that he lacked the knowledge regarding which particular plan was best suitable for him. The evidence of this can be found in the communication which took place between the two, where Albert had informed George that he should tell Albert the best plan which suited him, and that his requirements were for something small and cheap. The relationship which was present between the two showed the dominance of George on Albert. And taking advantage of this position, George suggested Albert the plan which was against his requirements, and was the most expensive one. Applying the case of Commercial Bank of Australia v Amadio, it can be clearly established that George was involved in unconscionability due to his conduct of taking advantage of the weaker position of Albert. Due to the presence of unconscionability, Albert can get the contract rescinded and not pay a single penny to George.

In such a situation where the weaker party, i.e., Albert refuses to fulfill his part of the contractual obligation, George has the option of making a claim of breach of contract by Albert due to his refusal for paying the consideration sum. Though, this would not be a successful claim, due to the presence of unconscionability. Further, Albert could always show that George was in breach of contract as the work done by him lacked desired quality. This would lead to the claims of George failing and Albert not being required to pay the consideration value.

Albert has the option of applying for remedies where he can claim monetary damages for his loss, along with for the payment made to the consultancy fee. In addition to this, he can claim the cost of renting, at $300 per week for 12 weeks, i.e., $360,000. In total, he can claim $510,000 as damages; this amount includes the sum paid for fixing the slab and for the fee of consultancy firm. Albert would not be required to pay $250,000, which is the amount claimed by George owing to the unconscionability on his part.

Conclusion

The discussion carried on above makes it very clear that George’s conduct depicted unconscionability. As a result of this, Albert can apply for rescission of contract and also claim monetary compensation for the breach of contract on part of George for providing subpar quality work.

3. Issue

The key issue in this case revolves around the most suitable business structure for Harry based on his requirements covered in the case study.

Rule

There are four key business forms which can be used in Australia for running the business and these are partnership, company, trust and sole trader. Each of these business structures has its own advantages and disadvantages and the final choice of business structure for a particular individual depends upon their requirements and these advantages and disadvantages.

Partnership, as stated earlier, is one of the forms of business structures in the nation. In a partnership form of business structure, two or more people come together with a common objective of carrying on the operations of the business and sharing the profits amongst them, in an equal manner. Each of the state in Australia has its separate Partnership Act and based on the jurisdiction in which the business is carried on, such act is applied. For instance, for the state of South Australia, the Partnership Act 1891 is applicable and for the state of Western Australia, the Partnership Act 1895 applies. In comparison to the company form of business structure, the starting and operating of partnership is considerably inexpensive. In this form of business structure, the partners share the profits and losses equally, unless a specific percentage is covered under the partnership agreement. Even though creating a partnership deed is not obligatory for partnerships in the nation, it is preferable to draw one so that the ambiguities of future can be clarified with the help of such deed. The control over partnership of each partner, their sharing of profits and their capital contributions are some of the details covered under the partnership deed. The advantages and disadvantages of a partnership form of business structure have been effectively summarized in the table below.

Advantages	Disadvantages
Due to the low starting up cost, the business can be established with ease.	The most disadvantageous reason which often makes people apprehensive about partnership form of business structure is the unlimited liability which is to be borne by the partners of the partnership firm. The partners are held jointly and severally liable for the debts of the company. And for the purpose of discharging the debts of the company, the personal assets of the partner can be attached.
With a high number of partners, the skill pool is widened, where each partner brings a unique skill to the partnership.	In case of a disagreement or friction between the parties, which remains unresolved, the situation can arise where the partnership is to be dissolved.
In comparison to sole trader, a higher capital is brought to the business.	Each partner is considered as the agent of the partnership and for the actions of one of the partners, the remaining partners can be held liable.
Each partner has its own borrowing capacity, which increases the overall borrowing capacity for the firm.	With the death of the partners, the partnership firm comes to an end.
Usually the employees who have high caliber are made partners, thus making them a part of the business.	Where a partner is added or removed from the partnership, there is a need to revalue the partnership, which involves additional costs for the partnership firm.
Unlike sole trader, the income and loss can be split between the partners, thus resulting in tax savings.
The structure of the firm can be changed with the decision of the partners.
The external regulations on partnership are limited.
The affairs of partnership firm remain private.

The other option which is available for the individual wants to operate their business in the nation is the company form of business structure. A company has been given the status of being a separate entity from the ones who run its operation. Though, the incorporation of a company proves to be a costly affair and is coupled with different reporting compliances, which is not present in the partnership form of business structure. In Australia, the Corporations Act, 2001 is applicable on all the companies, irrespective of their jurisdictional and they are regulated by the ASIC, which stands for Australian Securities and Investments Commission. On behalf of the shareholders of the company, the company is run by the directors and the officers. There are two kinds of companies, and these are public and proprietary limited companies. The public companies can freely raise capital from general public, but the proprietary companies cannot do the same and can issue shares only to their acquaintances. The advantages and disadvantages of a company form of business structure have been effectively summarized in the table below.

Advantages	Disadvantages
Unlike partnership form of business structure, the liability of the shareholders is limited in this form of business structure.	Each and every affair of a company is costly, be it formation, or winding up.
By simply selling the shares of the company, the ownership of one can be transferred to the other.	Different compliances have to be adhered strictly.
The shareholders can also be the employees of the company.	The affairs of a company are a public matter.
Without having to go through the hassle of applying different partnership act in each jurisdiction, the companies can freely continue their trade across the nation.	The distributable profit is taxable.
The taxation rates for companies are more favorable.	In case of failure of fulfilling the director duties, the directors can be made liable personally.
A higher capital base, along with wider skill base is present.

Application

The facts of the case highlight the need of Harry to raise capital and to have control over the business and keeping the right kind of employees. These requirements prove that the partnership is the right kind of business structure for Harry. This is because the capital can be contributed by new partners and he would have control over the company, which would not be possible in company form of business, as the word of the shareholders is the final decision for companies. Agreed that a higher capital can be raised by forming a public company, but this would mean losing the control over the business. And due to harry having no acquaintances or family, from whom he can raise capital under proprietary company, it is advised to Harry to go for partnership form of business structure.

Conclusion

The discussion carried on above makes it very clear that Harry should go forward with a partnership form of business structure as it best fits his requirements.

Bibliography

a. Articles/ Books/ Reports

Andrews N, Contract Law (Cambridge University Press, 2^nd ed, 2015)

Blum BA, Contracts: Examples & Explanations (Aspen Publishers Online, 4^th ed, 2007)

Cassidy J, Concise Corporations Law (The Federation Press, 5^th ed, 2006)

Emanuel S, Contracts (Aspen Publishers.., 8^th ed, 2006)

Gibson A, and Fraser D, Business Law (Pearson Higher Education AU, 2013)

Helewitz JA, Basic Contract Law for Paralegals (Aspen Publishers Online, 5^th ed, 2007)

Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31^st ed, 2012)

Marson J, and Ferris K, Business Law Concentrate: Law Revision and Study Guide (Oxford University Press, 3^rd ed, 2016)

McKendrick E, Contract Law (Pearson Education Limited, 11^th ed, 2015)

Mulcahy L, Contract Law in Perspective (Routledge, 5^th ed, 2008)

Poole J, Casebook on Contract Law (Oxford University Press, 13^th ed, 2016)

Stone R, and Devenney J, Text, Cases and Materials on Contract Law (Routledge, 3^rd ed, 2014)

b. Cases

Bisset v Wilkinson [1927] AC 177

Car & Universal Credit v Caldwell [1964] 2 WLR 600

Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130

Commercial Bank of Australia v Amadio (1983) 151 CLR 447; [1983] HCA 14

Smith v Land and House Property Corp (1884) 28 Ch D 7

c. Legislations

Corporations Act, 2001 (Cth)

Partnership Act 1891 (SA)

Partnership Act 1895 (WA)

d. Others

Australian Contract Law, Commercial Bank of Australia v Amadio (2013) <https://www.australiancontractlaw.com/cases/amadio.html>

Australian Taxation Office, Company (2017) <https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Choosing-your-business-structure/Company/>

Australian Taxation Office, Partnership (2017) <https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Choosing-your-business-structure/Partnership/>

Department of Industry, Innovation and Science, Partnership (2017) <https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-structure/Business-structures-and-types/Partnership>

Tasmanian Government, Company – advantages and disadvantages (2017) <https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/proprietary-company-advantages-and-disadvantages>

Tasmanian Government, Partnership – advantages and disadvantages (2017) <https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/partnership-advantages-and-disadvantages>

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