Business and Corporations Law

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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