Business and Corporations Law

This document discusses the issue of vicarious liability in corporations and the application of the principle of privity of contract. It also explores the different types of companies in Australia and the most suitable option for a given case. The document provides information on the category of the company in its first financial year and whether it will remain the same after five years. Additionally, it discusses the restrictions on selecting a company name.

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Business and Corporations Law

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Part A
Issue
The issue presented in this case is whether the corporation can be held liable towards
its customers based on vicarious liability for the actions of Martin. Whether the principle of
privity of contract can be applied in this scenario? Whether actions of Martin were outside
the scope of the employment and whether he can be held legally liable? Whether the
company can stop Martin from starting his new business?
Rule
A corporation is referred as a separate legal entity; it has a separate legal existence
which is different from its members and directors. Due to this legal existence, the corporation
can be sued by third parties, and it has the right to sue others as well. The corporation is liable
for the actions taken by its directors and employees based on the doctrine of vicarious
liability. As per this principle, another party can face legal consequences for the actions
which are taken by another individual based on their relationship (Chamallas, 2013).
Generally, the principle of vicarious liability applies in an employee and employer
relationship. The employer can be held liable by third parties for the tortious actions of the
employee which are taken within the scope of the employment. This principle was recognised
by the court in the judgement of New South Wales v Lepore (2003) HCA 4. As per the facts
of this case, the negligent actions of employees which come within the ordinary course of
employment can impose liability on the employer based on the doctrine of vicarious liability.
In this case, the court provided that the alleged sexual assault which was made by a teacher
on pupil in the school resulted in holding the school authority liable for breach of non-
delegable duty of care.
In the judgement of Lister v Romford Ice & Cold Storage (1957) AC 555, it was held
by the court that imposition of vicarious liability did not eliminate the liability of the
employee who acted in a negligent manner. A right is available for the employer against the
employee who has violated his/her duties, and he/she can recover damages from the
employee by holding them personally liable. The privity of contract is a relevant concept
which is a part of the common law. This principle provides that the rights and obligations
which arise based on a contractual relationship cannot be imposed on those parties who are

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not a part of the contractual relationship (Merkin, 2013). This principle is relevant while
imposing liability on the parties for violation of contractual relationship. In Tweddle v
Atkinson (1861) 1 B&S 393 case, the court prohibited a third party who was not a part of the
contract from acquiring the rights of recovering the benefit of a contract. The employment
contract plays a crucial part in determining the rights and liabilities of employee and the
employer. As per this agreement, the employer has the right to impose penalties on the
employee and holding him/her liable for their actions which resulted in violating the
employment terms. The concept of post-employment restraint clause is a relevant principle
which assists the employer in limiting the authority of the employee to leak trade secrets or
starting a new business in competition of the employer (Riley, 2012). In the judgement of
Smith v Nomad Modular Building Pty Ltd (2007) WASCA 169, it was held that if the
legitimate interest of employer is violated by the employee based on losing customers, leak of
trade secrets, attrition of employees and others, then the post-employment restraint clause is
considered as valid.
Application
In the present case study, Martin was working as a manager in Swimmingpool Co,
and he was authorised by the company to form contractual relationship with customers on
behalf of the company. He was authorised to form contractual relationships with customers
and collect money from them for development of pools. This money was to be deposited by
Martin to the bank account of the corporation. It was later found out that Martin has given
wrong information to customers regarding the placement of their swimming pools due to
which they were sinking in the ground. The negligence of Martin resulted in violating the
interest of customers. Based on the doctrine of vicarious liability, the customers have the
right to impose a penalty on the company (New South Wales v Lepore). It can be held
personally liable for the actions taken by Martin due to failure to maintain a degree of care.
Martin was given the authority to form contractual relationships between the company and its
customers; therefore, he was not the part of the contract.
The doctrine of the privity of contract allows Martin to eliminate his liability which
arises due to violation of the contract as he was not a party of the contract; thus, the liability
of violation of the contract cannot impose on him (Tweddle v Atkinson). Although Martin
cannot be held liable by the customers; however, he violated his duties given in the
employment contract. Thus, the company can impose penalty on Martin for negligently

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giving advice to customers and not submitting the money to the bank account of the company
(Lister v Romford Ice & Cold Storage). Moreover, Martin is starting a new business to
compete with Swimmingpool Co; he can use trade secrets to take the customers of the
company and negative affect its business (Smith v Nomad Modular Building Pty Ltd).
Therefore, the company can restrain him from setting by his rival business.
Conclusion
To conclusion, the company can be held liable for the actions of Martin based on
vicarious liability and Martin cannot be held obligated under the contract formed between the
company and its customers based on privity of contract. Martin acted outside the scope of the
employment; thus, the company can hold him liable for damages. Moreover, he can be
restrained from starting a new business since he can misuse trade secrets and acquire the
customers of the company.

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Part B
Issue
What are the different types of companies in Australia and which is the most suitable
option for the given case? Which category will be company will be in its first financial year
and whether the category will remain same after five years? Can ‘Anzac Coffee’ name be
selected for the company?
Rule
Type of Companies
Following are different types of companies which can be formed in Australia.
 Public company
These corporations can issue their shares in the public to collect capital for their operations.
They can list their shares on the stock exchange to issue their shares throughout the country
(eCompanies, n.d.).
 Proprietary company
These are privately held companies which can only issue their shares to private individuals,
and they cannot issue shares in the public to raise capital.
 Public companies limited by guarantees
The liability of members is fixed based on their guarantee which they have to pay at the time
of liquidation of the company.
 Public companies limited by shares
The liability of members is limited to the amount of share which they hold.
 Unlimited public companies
These public companies have members with unlimited liabilities.
 Unlimited proprietary companies

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Members of these private corporations have unlimited liabilities.
 No liability companies
These companies are incorporated for specific purposes or projects such as mining and
resource exploration.
Characteristics of companies
The key characteristics of a public company are its ability to issue shares in the public
to acquire capital for its operations and unlimited liability of members. However, these
corporations have to comply with a strict legal framework while managing their operations
(Welsh, 2014). The cost of issuing the shares to the public is an expensive process. The
process of incorporation is expensive and time-consuming. The corporations have to prepare
annual records and issue them to the public which eliminate privacy from its operations. The
directors have to conduct mandatory meetings to manage the operations of the company. On
the other hand, private companies are easy to form, and the parties did not have to invest
significantly in their incorporation process. The legal compliances are relatively less than
compared to public companies, and the company can establish a constitution to define the
role of its members (Keating & Keating, 2013). It becomes easier to define rights and
obligations of parties through this process. These corporations are governed based on the
provision of the Corporations Act 2001 (Cth) (CA).
Category of the company
Section 45A of CA provides that proprietary companies are categorised into small and
large categories. These differences are affected by their size and compliance with legal
policies. The number of non-employee shareholders in these companies is limited to 50
members. Section 45A (2) provides that if two or more elements mentioned below are
fulfilled in a financial year, then the company compared under the category of small
proprietary company (Austlii, n.d.).
 Less than $25 million of consolidated revenue
 Less than $12.5 million of consolidated gross assets
 Less than 50 employees

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Section 45A (3) provided that a company comes under the category of a large proprietary
company if two or more elements from the following points are fulfilled in a particular
financial year (Legislation, n.d.).
 Consolidate gross operating revenue of $25 million or more
 Consolidated gross assets of $12.5 million or more
 Hiring of 50 or more employees
As per section 45A (5), the ‘employees’ include both part-time and full-time employees.
Restricted words and phrases
There are certain words and phrases which cannot be selected by parties as the name
of their companies. For example, the names which could mislead public are prohibited such
as Royal Family or ex-servicemen’s names. Words such as building society, chamber of
commerce and university are prohibited as well. The terms bank, banker and banking require
permission from Australian Prudential Regulation Authority or APRA (ASIC, n.d.). Names
relating to Royal Family require prior ministerial consent as well. The words relating to
‘made in Australia’ require the approval of governmental authorities as well. Parties can visit
ASIC’s website to check the availability of their name. The names shown in green are
available, and red denotes unavailability of names. The names showing in ‘amber’ colour
cannot be selected without the prior permission of the ASIC.
Application
Incorporation of a proprietary limited company is the most suitable option in this
scenario. This corporation should be registered in the Corporations Act 2001 (Cth) with
ASIC. The alternative option is forming a public limited company which will provide
numerous benefits such as collection of capital from the public. However, the legal
complexities and compliances make it an unsuitable option. There will be lack of privacy,
mandatory director meetings, preparation and publication of annual reports and others. The
process of incorporation and issuing of shares is an expensive process as well. These
challenges are not available in the case of incorporating a proprietary company. The
information will be private, and the cost of incorporation will be cheaper. The parties will
have flexibility in their operations by establishing a constitution which can limit the rights
and liabilities of members.

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These operations are not available in the case of other corporations; therefore, the
proprietary company is the most suitable option available. In the first year of the company, it
will remain in the category of small proprietary company since the elements given under
section 45A (2) of CA are fulfilled. The company has less than 50 years, less than $12.5
million consolidated gross assets and less than $25 million gross revenue. However, this will
not be the same situation after five years, and the company will enter into the category of the
large proprietary company as per section 45A (3) since it will hire more than 50 employees,
consolidated gross revenue of $25 million and gross assets of $12.5 million. Lastly, ‘Anzac
Coffee’ is showing up in amber colour; therefore, it cannot be selected for the name of the
company without prior approval of ASIC.
Conclusion
To conclude, incorporating a proprietary company is suitable option due to its benefits; the
company will be in small proprietary company category, and its category will change after
five years to large proprietary company. Selection of ‘Anzac Coffee’ name requires prior
approval of ASIC.

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References
ASIC. (n.d.). Guidelines for ministerial consent-restricted words and expressions. Retrieved
from https://asic.gov.au/for-business/registering-a-business-name/before-you-register-
a-business-name/business-name-availability/guidelines-for-ministerial-consent/
guidelines-for-ministerial-consent-restricted-words-and-expressions/
Austlii. (n.d.). Corporations Act 2001. Retrieved from
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/
Chamallas, M. (2013). Vicarious liability in torts: The sex exception. Val. UL Rev., 48, 133.
Corporations Act 2001 (Cth)
eCompanies. (n.d.). Australian companies by type. Retrieved from
https://www.ecompanies.com.au/company-registration/resources/different-types-of-
companies/
Keating, B., & Keating, M. (2013). Private firms, public entities, and microeconomic
incentives: Public private partnerships (PPPs) in Australia and the USA. International
Journal of Organizational Analysis, 21(2), 176-197.
Legislation. (n.d.). Corporations Act 2001. Retrieved from
https://www.legislation.gov.au/Details/C2018C00424
Lister v Romford Ice & Cold Storage (1957) AC 555
Merkin, R. (Ed.). (2013). Privity of Contract: The Impact of the Contracts (Right of Third
Parties) Act 1999. Taylor & Francis.
New South Wales v Lepore (2003) HCA 4
Riley, J. (2012). Sterilising talent: A critical assessment of injunctions enforcing negative
covenants. Sydney L. Rev., 34, 617.
Smith v Nomad Modular Building Pty Ltd (2007) WASCA 169
Tweddle v Atkinson (1861) 1 B&S 393

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Welsh, M. (2014). Realising the public potential of corporate law: Twenty years of civil
penalty enforcement in Australia. Fed. L. Rev., 42, 217.