David's Contractual Obligations: Damages and Termination

The scenario involves Dave's Boating Pty Ltd terminating a contract with Bioplastic Ltd due to constitutional constraints. The question is whether the two grounds provided by Dave's Boating are enough to terminate the contract. The applicable law in this scenario is the law of agency and partnership, specifically the relationship between an agent (Angela) and a principal (Dave's Boating). The issue revolves around whether Bioplastic can seek damages if Dave's Boating does not ratify the contract within a reasonable time. It is concluded that the company has to keep its business interests high and decisions have to be made for the benefit of the company and its employees, thus justifying termination of the contract.

Answers
1. The three main advantages for David by incorporating Dave’s Boating Pty Ltd. are:
a) It will simplify and clarify the management and ownership of the money and various
assets of the company along with the bank accounts held in the name of the company.
Also, it is easier for the associations to enter into contracts1.
b) If in case smaller companies apply for small business loans, then the company requires to
prove that it is actually a business. Therefore, lenders and investors will seek the
company’s business registration as well as other application requirements before
approving for a loan.
c) The firms that are incorporated find it easier to attract capital investments because the
investors become confident they would not be legally obliged to contribute more funds if
in case the company gets into financial problem.
2. According to the Section 112 and 113 of Corporation Act, 20012, David needs to classify and
type of the company that is required. The proprietary companies that can be registered under
this act are – limited by shared and unlimited with share capital. So, his company’s name is
optional and followed by Pty Ltd.
Now, for registration and lodgment, David needs to comply with the Section 117 of
Corporations Act, 2001. As per the provisions, he has to follow these guidelines:
(1) To register a company, a person is required to lodge an application with Australian
Securities and Investments Commission (ASIC)3.
(2) The application needs to state –
a) Type of company to be registered
b) Company’s proposed name
c) Names and addresses of all the members
d) Family names, date and place of birth of members who consent to become director.
e) Family names, date and place of birth of members who consent to become company
secretary.
f) The address of company’s proposed registered office.
g) Details of issued shares.
The company’s internal management is governed by the provisions of Section 134, 135 and 136
that talk about constitution and replaceable rules. According to these provisions, the company
constitution is contract between company and each member, company and each director and
secretary, member and each other member. The replaceable rules, on the other hand, as per the
Corporations Act, are basic set of rules that are used for managing the company. If the
companies do not form constitution, its management can use the replaceable rules.
1 Register Company? - Some Pros And Cons Of Registering A Company In Australia incorporator.com.au
<https://www.incorporator.com.au/pros-cons-company.asp>.
2 Corporations Act 2001 Legislation.gov.au <https://www.legislation.gov.au/Details/C2013C00003>.
3 Jonathan Farrer and Ian Ramsay, "Director Share Ownership And Corporate Performance - Evidence From
Australia" (1998) 6 Corporate Governance.

3. Facts
Issue
Is David liable if Dave’s Boating Pty Ltd could fulfill the order to Perth Sea Rescue?
Rule
In January 2016, David entered into a contract with Perth Sea Rescue to supply it with 5 boats
for $100,000 as he was in the business of manufacturing boats. The contract was signed on the
part of David as “agent of Dave’s Boating Pty Ltd”. However, his company was registered in
July 2016.
The applicable laws in this case is Partnership and Pre-registration contracts4.
According to Section 131 of Corporation Act 20015, which talks about the contracts without
registration, the provisions are:
(1) If anyone enters into a contract on behalf of a company before it is registered, then the
company becomes bound by the contract and can make profit, if the company is
registered and ratifies the contract within agreeable time or reasonable time after the
contract was signed.
(2) The person will be liable to pay damages to the party to pre-registration contract if the
company so registered does not ratify the contract, if – time is agreed by both parties or
within reasonable time after contract was signed.
(3) If proceeding are brought in the Court regarding not ratifying the pre-registration of
contract, then as per the order, the company has to do any of the following:
a) Pay all the damages
b) Transfer the property received by the company
c) Pay an amount to a party to the contract
(4) If in case the company fails to perform even after the ratification of pre-registration
contract, then it will have to pay all or part of the damages.
Application
In the present case, David had a pre-registration contract with Perth Sea Rescue. So, he is bound
with a valid contract with Perth Sea Rescue. He is responsible to perform his duties as per the
contract. Now, after the registration of his company, Dave’s Boating Pty Ltd, it was required that
the company had to ratify the pre-registration contract. So, if he and his company fails to do all
of that, he will be liable to pay the damages to Perth Sea Rescue as per the Section (3), (4) of
Corporation Act, 2001.
Conclusion
4 "Statutes. Interpretation. Exclusiveness Of Statutory Remedy" (1919) 33 Harvard Law Review.
5 CORPORATIONS ACT 2001 Austlii.edu.au <http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>.

If it was proven that David violated the spirit of pre-registration contract and does not ratify the
contract neither in agreeable time nor within any reasonable time, the directors of Perth Sea
Rescue can seek their legal rights of damages.
4. Facts
Issue
i. Whether the contract with Bioplastic Ltd. will be enforceable
ii. Are the two grounds provided by Dave’s Boating Pty Ltd. enough for terminating the
contract?
Rules
Angela being the sales manager of Dave’s Boating Pty Ltd. placed an order for a boat made up
of high tensile plastic for $40,000 from Bioplastic. So, at that time she was acting as an agent on
behalf of Dave’s Boating Pty Ltd. in this scenario, the applicable law will be the law of agency
and partnership.
In Australia, particularly, the law of agency refers to a relationship that involves authority and
capacity in a person, called Agent, for the purpose of creating or affecting legal relations
between the main party, called Principal, and third parties6. The Section 126 of Corporation Act
2001 talks about agent exercising the company’s power to make contracts. Now, the relationship
between agent and principal is determined in a number of ways –
a) By agreement: it sets out as to what agent its authorized to do and the location and timing
of what the agent would be allowed to act.
b) By operations of law: it arises when there is necessary for the agent to safeguard the
principal’s interests and his act would be an honest endeavor in the principal’s best
interests.
c) By ratification: it arises when the conduct of the agent is ratified at a later date by the
principal.
After the decision being taken by Dave’s Boating Pty Ltd. to terminate the contract with
Bioplastic Ltd., it did so by citing the constitution of the company. So, the second applicable law
in this scenario will be the law regarding the limitations of company powers on account of
constitution of company.
So, as per the Section 125 of Corporation Act 2001, constitution will limit powers and set out
objects of the company7. As per its provisions:
6 "Partnership. Liability Of Members For Contracts Of Agent. Effect Of Limited Partnership And Joint Stock
Company Statutes" (1925) 39 Harvard Law Review.
7 Lexisnexis Australia – Lexisweb – Practical Guidance (2016) Lexisweb.lexisnexis.com.au
<http://lexisweb.lexisnexis.com.au/Practical-Guidance-Topic.aspx?tid=1804>.

(1) In case of a company having a constitution, it may have restriction or prohibition
regarding company’s exercise of any of its powers. The exercise of power cannot be
completely termed invalid just because the constitution suggests otherwise.
(2) If the constitution sets out company’s objects. Even then an act contrary to constitution
cannot be completely termed as invalid.
Application
When Angela had interacted with Bioplastic during the trade expo, she placed an order. The fact
that she was representing her company and being in a responsible position of making certain
business decisions on behalf of it. So, at this moment of time, it was clearly very easy to
conclude for Bioplastic that Angela had made an offer to them as she proactively placed an order
to them, probably because she was highly impressed by their technology.
After that when Bioplastic Ltd. telephoned Dave’s Boating Pty Ltd. in order to speak to the
managing director and take further information regarding the company and Angela. However, it
couldn’t talk to the MD while a clerk intimated to it on that very same phone call that Angela
was a senior executive and could take decisions and therefore, there would be no doubt in the
order. Then there remained no doubt regarding the offer made by Angela and Bioplastic had to
accept it. So, an agreement was formed between the two companies.
So, all of these facts suggest that Bioplastic Ltd. made every possible efforts to take due
diligence on its part. So, Dave’s Boating Pty Ltd cannot simply terminate the contract because
the constitution did not permit to involve in the different activity other than specified in it. But,
the law also says that even if the constitution is not being followed, the contract cannot be
completely made invalid. Moreover, as per Section (2) of Corporation Act 2001, any company
can modify or repeal its constitution or provision of constitution.
Conclusion
It may be argued that, the company has to keep its business interests high and decisions have to
be made for the benefit of the company and its employees. So, in this case, if the company feels
that the high tensile plastic machine will not be profitable as plastic boats will be suitable for
lakes and shallow water ways and not for oceans, its position is quite justified. So, it is concluded
that the whole contract and terms and conditions would be looked again.
References
Farrer, Jonathan and Ian Ramsay, "Director Share Ownership And Corporate Performance -
Evidence From Australia" (1998) 6 Corporate Governance

"Partnership. Liability Of Members For Contracts Of Agent. Effect Of Limited Partnership And
Joint Stock Company Statutes" (1925) 39 Harvard Law Review
"Statutes. Interpretation. Exclusiveness Of Statutory Remedy" (1919) 33 Harvard Law Review
Corporations Act 2001 Legislation.gov.au
<https://www.legislation.gov.au/Details/C2013C00003>
CORPORATIONS ACT 2001 Austlii.edu.au
<http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>
Lexisnexis Australia – Lexisweb – Practical Guidance (2016) Lexisweb.lexisnexis.com.au
<http://lexisweb.lexisnexis.com.au/Practical-Guidance-Topic.aspx?tid=1804>
Register Company? - Some Pros And Cons Of Registering A Company In
Australia incorporator.com.au <https://www.incorporator.com.au/pros-cons-company.asp>