LAW504 Business and Corporations Law: Steve runs a car hire Business

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Question:

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Assessment item 1 Task You must complete an on-line test which covers Modules 1 and 2. You must complete ten multiple choice questions online within 30 minutes using the Test feature on Interact2, between 00:01 on Monday 08 Aug 2016 and 23.59 on Sunday 14 August 2016 AEST. Rationale This test is designed to assess your understanding of the concepts contained in the first Topic, specifically: your knowledge of the Australian legal system · the rules of law relating to the rules governing the jurisdiction of courts ·the · doctrine of precedent · your understanding of the rules of statutory interpretation and to gauge your engagement with the subject Assessment item 2 Task You must write an answer to the problem-type question below, using the ILAC (Issues, Law, Application, Conclusion) format, a worked example of which is in the Resources folder. **In this subject, assignments are marked on-line, using an adapted MS Word programme. You therefore MUST submit your assignment in Word format, NOT as a PDF document. If you submit in PDF it will not be able to be marked.** ##If you think you may need and extension for this assignment, please read the rules relating to extensions in the Subject Outline before applying for an extension. ## Question Steve runs a car hire business. Steve is a sole trader - his business is not a corporation. He tells you about the following events: Steve’s friend Tom runs a trucking company. Tom phones Steve and says ‘I need to hire a truck capable of carrying 10 tons of cargo’. Without checking the specifications of the vehicles he has available, Steve says ‘I have just the thing for you - a Hino Cargo Master - it can carry 12 tonnes’. Tom agrees to hire the truck at $ 200 per day, and picks it up. He loads it with 10 tonnes of cargo, but on its way to make a delivery, the suspension collapses. As a result, he is unable to use it and loses $ 5 000 per day in profits. Pamela has often watered Steve’s garden when he (Steve) has been away on holiday. Pamela phones Steve and says ‘I’ve got a problem - my car is being fixed and I am going on holiday tomorrow, but I can’t afford to hire one. Can you help me out?’. Steve says ‘Sure - you looked after my garden last month, so I’ll lend you a car for the weekend because you did that’. When Pamela comes to collect the car, however, Steve tells her that he hired it to another customer. Pamela says that Steve has broken the contract she had with him and that she will be consulting a lawyer. Danny telephones Steve and says ‘I would like to hire the Toyota Corolla I used last week’ Steve says ‘The charge will be $ 40 per day plus fuel and you can collect the car tomorrow’. Danny says ‘That’s great, I will be there at 9 am’. When Danny arrives at the car lot, Steve says that when he had been speaking to Danny, he was unaware that the vehicle had already been destroyed in a crash while being driven by another customer the previous day. Danny refuses to take a different car and says he will go to court to enforce the contract he had with Steve. Steve is thinking of putting in a new airconditioning unit in his premises. He has been in negotiations with Cool It Aircon Ltd, owend by Trisha. One Monday morning he comes into his office and sees the latest draft contract from Cool It Aircon, with details of specifications of the airconditioners, price and installation date. The top sheet of the contract contains a space which says “I agree to these terms of supply” and with a space for a signature and date. Steve sets the contract aside on his desk, and it soon gets mixed up with piles of other paperwork. Later during the day, he signs the form, thinking that it was the front page of another contract he had been sent by a supplier of microchips. He gives it to his office manager, Tim, and says “Send this by fax”. A few days later a truck from Cool It Airon arrives at Steve’s business. Steve phones Trisha and says he never agreed to the installation. When Trisha tells him about the fax, he realizes his mistake and tells her that he had sent it by accident. She says “Toobad, we have a deal – I have already spent several thousand dollars making customized components for your system”. Advise Steve on his legal position in relation to each transaction, backing up your answers with relevant rules of law. Rationale This assessment item will allow you to demonstrate your ability toengage in legal research; identify the legal issues arising out of novel factual situations, to analyse the applicable law and to differentiate between which rules are applicable and which are not and then apply the law to the problem; explain and summarise the applicable law in such a way as to create a report for a client which states what liabilities arise from novel factual situations And more specificallyyour knowledge of the law of contract formation and the law relating to factors affecting the validity of contracts your ability to undertake an assessment task relevant to the workplace and professional practice.

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Solution:

Question One

Issues

Peter, Aidan and Adrian are partners with a partnership agreement which state that each partner can enter into contracts worth up to $ 10,000 but any contract in excess of the amount need prior agreement of all the partners. Adrian has gone contrary to this requirement whereby he purchases accounting journal with the asking price of $ 15,000. Further, he purchases surveying instruments for $ 8,000 which is outside the scope of business of the accounting firm. Peter and Aidan are not bound by these transactions as the first goes against the partnership agreement while the second is not within the scope of the firm’s business. The question is whether Tom and Edgar can sue the firm and whether the partners are liable.

Law

The law governing partnerships is the Partnership Act 1892 (NSW). When a firm has a written partnership agreement stipulating the authority of the partners they all have express authority to this extent and any contract entered into by each partner to the extent binds all the other partners. However s 5(1) of the Act provides that even in the absence of express conferral of authority by the partners, each partner has implied authority to act as an agent of all the other partners in regards to the business of the partnership. The authority conferred however is only restricted to the nature of the business and as such a transaction which is outside the partnership business is not binding to the other partners of the firm as illustrated in Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11. The acts which are not within the business of the firm only binds the other partners only if special express authority was given to the partner as provided in s 7. When an act lies within the express, ostensible or implied authority of a partner, s 6(1) of the Act provides that all the partners are bound by the acts of the other partners as illustrated in Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541. Further s 5(1) provides that in the event a partner contracts beyond the express authority for instance through disregarding a limitation of authority in the partnership agreement, a third party still can hold a partnership liable if he proves that the transaction was within the usual implied authority of the partner carrying that specific business unless the other partners are able to provide that the third party was aware of the lack of authority by this partner or aware that the person was not a partner (Radan & Vickovich, 2013, p. 33). This is further illustrated in Rapp v Latham (1819) 2 B & Ald 795. Section 8 of the Act clearly provides that any internal agreement between partners limiting their authority only impacts the third party rights only if they are aware that such an agreement exists as illustrated in Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103. Bowman v Bacon (1897) 18 LR (NSW) 12 further illustrates this and argues that any restriction or termination on a partner needs to be given to the outsider.

Application

Tom is a third party who engages with Adrian through a contracting t purchase accounting journals at a price of $ 15,000. Adrian has implied authority to act as an agent of the other partners in the firm with regards to the business of the partnership which is accounting. The implied authority is restricted to the nature of the business whereby such a transaction is within the partnership business and as such this is binding to all the other partners of the firm. Tom can sue all the partners for breach of contract as Adrian was acting on implied authority for all the other partners of the firm. Tom needs to prove that the transaction is within the usual implied authority of the partner who carries the transaction. Accounting materials purchased by Adrian are in the nature of the business of the firm and Tom is not aware of the partnership agreement which limits the power of Adrian to a transaction of up to $ 10,000. Edgar on the other hand cannot sue the other partners for breach of contract as surveying is not within the nature of the accounting firm. Despite the fact that the transactions is within the express authority given to him as it is below $ 10,000, it is not within the accounting firm nature of business and as such the other partners are not liable. Edgar can however sue Adrian for breaching the contract. In a partnership, the partners are not agents of the firm but rather can individually be held liable for their action. As such, Adrian is liable for the transaction with Edgar.

Conclusion

Tom is a third party who can sue the firm for a breach as buying accounting materials is in the line of business of the firm and as such all the partners are liable while Edgar can only sue Adrian as surveying is not in line with the business of the firms and as such the other partners are not liable.

Question Two

Issues

Richard was employed to sell slimming products in Victoria for Nu-Slim Pty Ltd from 2008 to 2013 with his contract stating that should he leave the company, he cannot sell slimming products in Victoria for a period of three years. However, in 2014 he registered a company Fat-Away Ltd whereby he owns 99% of the shares and his sister owns1%. The sister is the managing director and CEO of the company with the company having operations out of Melbourne and sells slimming powder throughout Victoria. Despite the fact that all the sales are signed by Fances, the sister, on behalf of Fat-Away Pty Ltd, Richard breached the terms of his contract to Nu-Slim Pty Ltd as the company whereby he is a major controller and founder operates in Victoria and within the three years restricted by his contract. Richard can be held liable for breach of contract by Nu-Slim Pty Ltd if they do not cease the operations of Fat-Away Pty Ltd in Victoria. Further, Frances contracted on behalf of the company by taking a loan from United Bank in 2014 and the company is unable to meet its loan instalment obligation of $ 40,000. Frances is acting on behalf of the company and the company can be sued as it is a separate as it acquires a legal person status, by the bank.

Law

The law governing companies are the Corporations Act 2001 (Cth). Section 19 of the Act provides that when a company comes into existence as a body corporate after registration whereby it becomes a legal person as illustrated in Salomon v Salomon & Co Ltd [1897] AC 22. Formation of a company results to the company becoming a separate entity from its founders and shareholders, can be sued or sue, perpetual succession, and capacity to own property results to the establishment of the corporate veil. This is as illustrated in Lee v Lee’s Air Farming Ltd (1961) AC 12 whereby despite the fact that Lee is the owner of the company as well as managing director, he was an employee and this fact he was behind the company veil is not relevant as he was still an employee. It illustrates that a shareholder can contract with the company in which one owns shares. Section 124 (1) (a) provides that the company acquires a legal capacity and the powers of an individual’s as well as the powers of a body corporate. Section 22 of the Acts Interpretation Act 1901 (Cth) puts further emphasis that a person includes a body corporate unless otherwise stated. Briggs v James Hardie & Co Pty Ltd & Ors (1989) 16 NSWLR 549 at 567 provides that when making a decision on whether to lift or not, specific facts and context is the basis for making the decision. The corporate veil however can be lifted for instance in getting to the human controllers of the company and in putting the company’s action to them. As illustrated in Gilford Motor Co Ltd v Horne [1933] Ch 935, when the owners of the company are avoiding contractual obligations for instance an employee of plaintiff having signed a restraint of trade contract. In the event that he starts engaging in the same line of business whereby he signs contracts in the name of the company which have been formed by him, it was held that the restraint had been proven and it can be looked behind the company and identify him as one of its controller. Others cases where the corporate veil can be lifted includes where fraud has taken place with the company formed to defraud its clients (Donnelly v Edelsten (1994) 13 ACSR 196 at 256), and where a company is being used to escape effect of law (Pentony, et al., 2013). Further, as the company is a separate entity and can be sued and sue (Courmadias, 2015, p. 178). This is as illustrated in Salomon v Salomon & Co Ltd [1897] AC 22 whereby the formation of a company results to the company becoming a separate entity from its founders and shareholders, can be sued or sue, perpetual succession, and capacity to own property results to the establishment of the corporate veil.

Application

First, Richard had breached his contract with Nu-Slim Pty Ltd which provided that after leaving the firm, he should not sell slimming products on Victoria for three years. This breach occurred when he formed a company Fat-Away Pty Ltd whereby he is a majority shareholder and thus a controller of the company. This is despite the fact that the sister is the MD and CEO and signs on the sales. Fat-Away Pty Ltd is a body corporate and as such a separate entity from its founders and shareholders. However, the corporate veil can be lifted in a bid to get human controllers of the company as the company exists as a virtual person. As such, Richard cannot escape his contractual obligations with Nu-Slim Pty Ltd. Nu-Slim as such can sue the company whereby the corporate veil can be lifted which separate him from the company and be liable for his breach of contract. On the other hand, Frances signed the loan agreement with the bank on behalf of the company. As such, the company can be sued by the bank on its breach of contract on meeting its financial obligations. Richard and Frances cannot be sued on this breach but rather the company itself is the one sued.

Conclusion

Richard as such is liable and can be sued by Nu-Slim from his breach of contract as he engaged in a similar trade within the specified time of three years for restraints to trade. However, Richard is not liable for loan instalments as the bank has a contract with the company and not with Richard.

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