Enforceability of Contracts and Directors' Duties in Business Associations

LAW OF BUSINESS ASSOCIATION
Student Name
[Pick the date]

Question 1
Part (a)
The main issue is to tender advice to Raj and Alana with regards to whether the contract enacted
between Seedy Vineyards and Organic Wines Pty Ltd (OW) is an enforceable contract or not
taking into cognisance the following aspects.
 When agent Priya has entered into legal relationship with Seedy Vineyards irrespective of the
fact that she is exceeding the level of authority.
 Breach incurred of the objects clauses of OW’s constitution
Company holds a separate legal title from the owners as highlighted in s. 124(1). Company has
various agents who form legal relationships with the third party in the name of company. These
agents receive authority from the company to form legal contractual relations. These agents are
not liable for the contractual liabilities which they have formed on behalf of the company with
third party. When agents are forming contract in the name of company with the third party while
they are not having sufficient authority, then the relevant provisions applicable are highlighted in
s. 129, Corporations Act 20011. In accordance with this section, the third party has the legal right
to assume that the agent who works for the company holds requisite authority and hence enacts
the contract in good faith. The rights of the third party will be safeguarded under indoor
management rule as they have entered in good faith and do not have any clue regarding the lack
of authority of agents. As a result, the contractual liabilities raise from the enactment of the
contract by agent will be enforceable on the company and company has to discharge all the
contractual liabilities. Further, Royal British Bank v Turquand2 is the evidence of above
highlighted understanding3.
The exception of s. 129 is highlighted in s. 128, where the third party have reasonable suspicion
about the lack of authority on the part of agent4. It means when the third party has any hint,
1 Austlii, Corporations Act 2001- Sec 129 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s129.html
2 Royal British Bank v Turquand (1856) 6 E&B 327 case
3 Jason, Harris, Corporations Law, (LexisNexis Study Guide, 2nd ed., 2014)
4 Austlii, Corporations Act 2001- Sec 128 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s128.html
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knowledge or suspicion about the lack of authority of the agent and still has enacted a contract
with the agent then, the contract would not be enforceable on company5.
The relevant provision with respect to the objects clause is s. 125 (2) that indicates that breach of
only the object clauses by the agent would not limit the activity of the company thereby not
making it illegal. In other words, 125 (2) provides wide scope for the course action of company
while making legal relations with third parties even through there is breach of object clauses
which is mentioned in company’s constitution6.
In present case, Priya has been appointed as the managing director of Organic Wines Pty Ltd
(OW) and has the authority to work on behalf of OW and to form contracts with third parties.
Priya has entered into a contractual relationship with Seedy Vineyards. However, it has been
found that she does not hold required authority which is evident from the two factors which are
listed below.
 Priya has been appointed as the managing director of Organic Wines Pty Ltd (OW) for a
tenure period of 2 years which ended in February 2018 and therefore, it is essential to
reappoint her on the position of managing director so that she can again work for OW.
However, she has not been reappointed for the position and therefore, as per the constitution
of the company she does not have authority to work as managing director of company after
February 2018. However, she has enacted a contract with Seedy Vineyards In June 2018
which is invalid.
 It is clearly stated in the constitution of company that she cannot form contracts for any
transaction higher than $100,000 but she has formed a contract with Seedy Vineyards for
$500,000 which is in violation with the company constitution.
Therefore, the conclusion can be drawn that Priya has formed the contract with Seedy Vineyards
while holding lack of authority from OW. Further, it is essential to note that Seedy Vineyards
does not have any hint or suspicion about the lack of authority of Priya as she was working for
OW for more than 2 years and hence, Seedy Vineyards has entered into contract in good faith.
Thus, indoor management rule will be enforceable here as per s. 129, Corporation Act 20017.
5 Julie, Cassidy, Corporations Law Text and Essential Cases, (Federation Press, 4th ed., 2013)
6 Austlii, Corporations Act 2001- Sec 125 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s125.html
7 Ibid. 2.
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