Business and Corporations Law (pdf)

BUSINESS AND CORPORATIONS LAW
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STUDENT ID OR NAME
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Question 1
Issue
The major issue in the present case is to determine the presence of any enforceable contract
between Terence and outsider parties named Gabby, Mary and Gordon on the account of the
contract enacted by agent Sara and Peter respectively.
 Sara enacted a contract with Gabby to design and sell a brooch of elephant shape worth
$1000
 Peter enacted a contract with Mary to buy gold for jewellery worth $1500
 Peter enacted a contract with Gordon to buy diamond for jewellery worth $5000 and has
disappeared to South America and has not informed Terence
Law
Agent is a person who has received the authority and rights from the principal to deal with
external parties in the name of the principal. The associated rights and obligations of this
relationship are discussed in a special law called agency law. There is a possibility that agent
would not complete the fiduciary duties and work against the instructions given by principal.
In such case, the principal can sue the respective agent and claim for the incurred damages
(Pendleton & Vickery, 2005).
The agent would receive either of the below highlighted authority from the principal.
 Apparent authority
 Express authority
There may be instances where the principal has not specifically announced or directed the
authority to the agent but has presented such that the external party would believe that agent
has the power to enact contract on the part of principal. In such condition, the authority would
not be given but is present and hence, would be termed as apparent/implied authority. The
case where the principal has clearly directed the authority to agent, then it would be called as
express authority (Edlin, 2007).
According to the highlights of agency law, the principal is liable for the contracts executed by
the agent only when the external parties have entered into contractual relation in good faith
under the assumption that agent has the authority to enact contract on behalf of principal. The

contractual relationship would occur between principal and external party but not between
agent and external party. This is because the agent is the representative of principal and
therefore, the contract would be enforceable between principal and third party not with the
agent (McKendrick, 2003).
There is a critical aspect that when the agent does not possess the authority to create legal
contractual relationship with the external party but subsequently enacts contract with the third
party, then the following aspects would be taken into account (Harvey, 2009).
 Whether the external party is aware about the agent not possessing the authority to
execute contract on the part of principal.
According to the judgement given by honourable court in Royal British Bank v Turquand
(1856) 6&B 327 case, the indoor management doctrine principal would validate such
transactions and the principal is bounded with the contractual duties that have arisen by the
contract created by agent. This is because third party does not know about lack of authority
and entered into contract in good faith (Gibson & Fraser, 2014).
 Whether the external party has any clear suspicion or doubt regarding the aspect that the
agent lacks the authority to enact contract on the part of principal.
 Whether the external party knows that the agent does not possess authority to enact
contract but still creates legal relationship with agent.
According to the judgement given by honourable court Freeman& Lockyer v Buckhurst Park
Properties [1964] 2 QB 480 case, the indoor management doctrine principal would not be
valid and the principal is not bounded with the contractual duties in such contracts.. This is
because third party already knows that agent does not possess authority and still has entered
into contract (McKendrick, 2003).
Application
Terence is the owner of Terry’s Terrific Designs Company and has appointed Sara and Peter
In first case, Terence has provided authority to Sara to work as an agent on his behalf. Gabby
is a customer who is willing to purchase designer brooch and therefore, agent Sara has met
Gabby and finalized a design with a consideration of $1000. It is apparent that Sara is not
enacting contract for herself because she is representing Terry.. Hence, an enforceable
contract is formed between Terence and external party Gabby.

In second case, Terence has specifically ordered Peter not to buy gold for company.
However, Peter has formed a contract with a regular gold dealer Mary to purchase gold to the
tune of $1500. It is also evident from the case facts that Mary is not aware that Peter should
not buy gold and hence, as per indoor management the contract is valid between Terence and
Mary. However, Terence can recover the damages and sue Peter for disobeying the
instruction given.
In third case, Terence has taken all the given authority from Peter and also fired him from
company. However, Terence has not terminated his access to business Gmail account. Hence,
Peter has misused the business account and purchased diamond from regular diamond seller
Gordon for $5000. Also, he has taken the diamonds from Gordon and has left the place and
has shifted to South America.
It is clear that Gordon does not have any communication from Terence or otherwise that
Terence has taken all authority from Peter. Therefore, enforceable contract is enacted
between Gordon and Terrence. However, Peter can be sued on behalf of the Terence for
misusing the business account and acting fraudulently.. Terence has rights to claim for the
damages and recovers diamond or equivalent amount from Peter.
Conclusion
Terence has enforceable contract made with Gabby, Gordon and Mary based on the
contractual agreements enacted by his agent i.e. Sara and Peter. Additionally, Terence can
sue and recover damages from Peter since Peter has taken diamonds and absconded.
Question 2
Issue
Based on the stated facts, legal advice needs to be given to Roger regarding the following two
aspects.
 Suppliers of United Chemicals Pty demanding outstanding payment from Roger
 Decision taken to not extend the explosive manufacturing license to the company
owned by Roger on grounds of criminal record of Roger
Law

In accordance with s. 124(1), company as a business structure tends to have a separate legal
status. Hence, unlike partnership which is recognised by the partners, there is a clear
distinction between the company and owners. The company through the agents can enact
contracts on its behalf and it would be held liable for any rights and liability arising out of the
same. This is a unique situation considering that in other business structures, the liability
essentially rests on the owners of the business since the underlying structure lacks a legal
entity. Thus, in case of a contractual relationship with company, it is possible that the other
party can sue the company for non-fulfilment of contractual obligation (Davenport & Parker,
2014).
Also, irrespective of whether the company is in position to settle the outstanding creditors,
these cannot demand money from the shareholders considering that the contractual
relationship was entered with the company and not the shareholder. Further, carrying
forward this reasoning, it would be appropriate that the creditors consider this difference in
identity and limit their legal actions only against the contracting party and not to others who
are not parties to the contract which might have been breached (Richard, 2003).
This concept came into existence as a result of the verdict in the historical Salomon v
Salomon & Co Ltd [1897] AC 22 case. The defendant in this case was named Salomon who
was in the shoe business. With the intention of transferring the business to a company, he
formulated a new company. In return, he was awarded with shares along with debentures on
account of money due. The company after some time went bankrupt leaving behind unsettled
creditors and outstanding debenture holders (Talyor & Taylor, 2015). They initiated legal
action against Salomon for recovering the money. The matter landed in court where based on
the relevant facts, court highlighted the separate legal status of the company and thereby
pronounced decision in favour of the defendant. It was advocated that considering that
contractual obligation are directed towards the company which cannot be presumed the same
as owner (Salomon). (Carter, 2012).
Despite the immunity offered to members, there is a remedy in the form of lifting the
corporate veil which may be carried out in appropriate circumstances (Andrews, 2011). The
court can order doing the same provided based on the case facts there exists sufficient doubt
that there is an ownership issue and thus a relationship based on implied agency may exist
between the company and defendant. One case which offers clarity regarding application of
corporate veil lifting is Gilford Motor Company v Horne [1933] Ch 935 (Gibson & Fraser,

2014). This case involved the use of company as means to escape liability by the defendant.
The defendant wanted to compete with his employer despite having a non-compete
agreement with the same. Thus, to escape legal liability, a company was floated and
ownership was granted to the family members. The defendant was engaged in the position of
an employee. However, when court began proceeding, it becme amply clear that company
came in place only to make defendant immune. Thus, the defendant was held guilty by the
court despite the principle of corporate veil being in place (Carter, 2012).
Application
United Chemical Pty Ltd is a company whose managing director is Timothy Smith while his
brother Roger Smith happens to own more than 90% of the company. This company has
enacted a legal contract for the supply of a machine with another company named Industrial
Machines Ltd. The total consideration for the machine is payable over three years. The
company on concern of poor business defaults on the last payment. The supplier considers
the wealth of Roger Smith and demands that he should bear the pending payment. However,
such a demand would lack a solid legal footing considering that even though Roger has high
stakes in the company but still the identity of company is different from Roger. Considering
the fact that sale of machine has been done to United Chemical Pty Ltd, hence recovery of the
dues should also be made from the company. As per the verdict in the Salomon case, Roger
cannot be held liable for the outstanding payment to Industrial Machines Ltd.
Also, the case details highlight Roger’s intention to foray into explosive manufacturing.
However, to start this business, licence is required. He made an application for the same but
had to see rejection owing to the legislation which does not allow issuance of license of any
entity with past criminal offence. In order to overcome this issue, Roger incorporates a neew
company with 99% ownership and makes a fresh application in the name of the company
which has been rightly rejected by the department. Clearly, the company has been put in
place only to obtain license and essentially there is no legal separation between the company
and Roger in accordance with the verdict in Gilford Motor Company v Horne case.
Conclusion
It would be fair to conclude that liability to clear outstanding supplier dues does not arise for
Rogers considering the separate legal identify of company. Further, the decision to reject the
company’s application for the license is also correct and based on sound legal footing.

References
Andrews, Neil, (2011). Contract Law (3rd ed.). Cambridge: Cambridge University Press.
Carter, J. (2012). Contract Act in Australia (3rd ed.). Sydney: LexisNexis Publications.
Davenport, S. & Parker, D. (2014). Business and Law in Australia (2nd ed.). Sydney:
LexisNexis Publications.
Edlin, D. (2007). Common law theory (4th ed.). Cambridge: University Press Cambridge.
Gibson, A. & Fraser, D. (2014). Business Law (8th ed.). Sydney: Pearson Publications
Harvey, C. (2009). Foundations of Australian law (2nd ed.). Prahran, Vic.: Tilde University
Press.
Latimer, P. (2016). Australian Business Law CC (1st ed.). Sydney: LexisNexis Study Guide.
McKendrick, E. (2003). Contract Law (5th ed.). Basingstoke: Palgrave.
Peel, E. (2008). The Law of Contract (7th ed.). London: Thompson.
Pendleton, W. & Vickery, N. (2005). Australian business law: principles and applications
(5th ed.). Sydney: Pearson Publications.
Richard, S. (2003). The Modern Law of Contract (5th ed.). London: Cavendish.
Taylor, R. & Taylor, D. (2015). Contract Law (5th ed.). London: Oxford University.