Business and Commercial Law

This article discusses the principles of agency law, implied authority, and ostensible authority in business and commercial law. It also explains the concept of separate legal entity and limited liability of a corporation. The article provides case examples to illustrate the application of these principles. The article also discusses the possibility of lifting the corporate veil to hold individuals personally liable for the actions of a corporation.

Running head: COMMERCIAL LAW 0
Business and Commercial Law

COMMERCIAL LAW 1
Question-1
Part-1
Issues
Is a valid legal contract is constructed between Gabby and Terence even when Gabby
enter into a contract with Sara?
Law
In this case, the principle of agency law applies. An agency is an agreement between
two or more parties one of the party is the principal whereas the other party is the agent (CSU
LAW504 Modules, 2018, Topic 12). In this agreement, the principal gives the agent authority
to establish contract with third parties on his behalf. The provision of undisclosed principals
provides that the principal is bound by the terms of a legal agreement which is created by the
agent even if the agent did not disclose to the contracting party that he or she is working on
behalf of the authority given by the principal. Furthermore, in cases of an undisclosed
principal, the doctrine of election applies which provides that the third-party can choose
between the agent and the principal and decides who will perform the terms of the contract
(Munday & Munday, 2010, pp. 245-246).
In Siu Yin Kwan v Eastern Insurance Co Ltd (1994) 2 AC 199 case, an employee died
in an accident, and his representatives claim money from the insurance company. The
insurance company claimed that the number of the corporation is written in the contract of
insurance; hence the employee’s representatives cannot claim the insurance money. The court
held that the company is an agent of its employees; therefore, based on the provision of an
undisclosed principal, the representatives of the employee can claim for the insurance money.
Application
Sara failed to disclose to Gabby that she is an agent of Terence, and she entered into a
contract with Gabby. Later, Terence called and disclosed his agency to Gabby. As given in
Siu Yin Kwan v Eastern Insurance Co Ltd case, a third-party formed a legal contract with
both the principal and the agent in case of the agency is disclosed. Based on such provision,
Terence and Gabby have entered into a valid legal agreement, and Gabby enforce the
performance from either party.

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Conclusion
To conclude, a valid contract exists between Terence and Gabby because Sara acted on
behalf of Terence, and Gabby can ask for fulfilment of the terms of the contract from either
Terence or Sara.

COMMERCIAL LAW 3
Part-2
Issues
Is there a contract between Terence and Mary?
Law
The principal is bound by the fact whether he or she has given the authority to the
agent (CSU LAW504 Modules, 2018, Topic 12). The agency law categorised agency into
three parts which include actual, ostensible and authority of necessity. The actual authority is
categorised into two parts which include express and implied. The express authority to
perform an action or enter into a legal agreement which is given in writing or orally by the
principal is called express authority. On the other hand, the implied authority implies in a
case when the principal hires an agent on a specific post and in order to perform his or her
duties the agent is required specific authorities. The implied authority is included in the scope
of the position of a job (Busch, Macgregor, & Watts, 2015, pp. 61-62). When an employer
gives title or role to an employee, then the authority necessary to discharge such role is called
implied authority.
An important decision was given in the Watteau v Fenwick (1893) 1 QB 346 case. In
this case, the court provided the judgement based on the provision of implied authority. In
this case, a pub owner (Fenwick) hired a manager (Humble) to run its operations for him
giving him authority to perform actions which are usually performed by ‘pub manager’.
Fenwick asked Humble not to purchase anything other than mineral waters and bottled ales,
however, Humble entered into a contract with Watteau for the purchase of cigars. After
finding out about the agency of Fenwick, Watteau filed a suit against him for collection of
unpaid amount. The court held that Humble had implied authority to enter into a legal
contract for Fenwick, therefore, Fenwick has to pay the unpaid amount to Watteau.
Application
Terence has hired Peter as a Supplies Purchaser giving him the authority to purchase
supplies and entered into contract on his behalf. Mary had often dealt with Peter before, and
she knows that he has the authority to act on behalf of Terence. In Watteau v Fenwick case,
the court held that Humble had the authority of action on behalf of Fenwick and he is liable to
pay unpaid amount of cigars to Watteau. Similarly, in this case, Terence and Mary have

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entered into a contract because Peter has the authority to make purchasing decisions for
Terence.
Conclusion
To conclude, Terence and Mary have entered into a contract because Peter has
implied authority to act on behalf of Terence, and Mary can file a suit against him if he failed
to comply with the terms of the contract.

COMMERCIAL LAW 5
Part-3
Issues
Is there a contract between Gordon and Terence?
Law
In order to establish ostensible authority, the principal represents that the agent is in
the position to enter into a legal contract on his behalf whereas, in reality, he did not have
such power (CSU LAW504 Modules, 2018, Topic 12). In case ostensible authority is
established, then the party which has entered into a legal agreement with the agent based on
the representations made by the party has the right to enforce the performance of the contract
either from principal or the agent. The judgement given in the Freeman & Lockyer v
Buckhurst Park Properties (1964) 1 ALL ER 630 case is a good example in which the board
allowed a director (Kapoor) to take actions as the managing director of the company in
specific situations. In reality, they did not appoint Kapoor as the MD of the company. Kapoor
used his title to contract with two architects for working on a project; however, the board
denied that Kapoor did not have the authority to enter into a contract. The court declines the
appeal by stating that the contract is valid because the bored represented that Kapoor is the
MD of the company in specific situations which is enough for a third party to assume the
authority of Kapoor, therefore, the contract is valid.
Application
Although Terence fired Peter, he failed to shut down his access to the email system of
the company, and he used it to book an order with Gordon who had often dealt with him
before and knew that he poses the authority. As per Freeman & Lockyer v Buckhurst Park
Properties case, if a principal let others believe that the agent has the authority to act on his
behalf, even when he/she did not have such authority, the principal is bound based on actions
of the agent. Similarly, Terence failed to shut down Peter’s access to the email system, and he
used it to book order with Gordon, therefore, based on the provision of ostensible authority,
Terence and Gordon have entered into a contract.

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Conclusion
To conclude, there is a contract between Terence and Gordon because of the provision
of ostensible authority because actions of Terence let Gordon believed that Peter has the
authority to act on his behalf.

COMMERCIAL LAW 7
Question-2
Part-1
Issues
Is Roger personally liable to pay $200,000?
Law
The definition of a company is given under the section 119 of the Corporations Act
2001 (CSU LAW504 Modules, 2018, Topic 14). The section provides that a ‘company’ is
referred to a body corporate which comes into existence upon its registration. It means that a
company became a legal person after its registration. The characteristics of a corporation
include legal existence which is separate from its owners, a perpetual succession which
means it continues to exist until liquidation, and it has the ability to enter to legal contracts
with third parties, and in case of breach of such contracts the company can sue or get sued by
third parties. The section 124(1) (a) of the act provided that a corporation has the rights of a
natural person. The corporation has a separate legal entity and just based on the fact that a
shareholder owns a large number of shares in the company, it does not become his/her agent.
The separate personality and limited liability concept are included in the
characteristics of the company which was first given in the case of Salomon v Salomon & Co
Ltd (1897) AC 22. Salomon transferred his assets from a sole proprietary business to a
company (Salomon & Co Ltd), and in return, the corporation paid him shares and debentures.
The company become insolvent, and creditors’ money remained unpaid whereas the company
paid Salomon because he was a debenture-holder. The creditors filed a claim in the court on
the basis that debenture was a sham; therefore, Salomon is responsible toward the creditors.
The House of Lords rejected the arguments of creditors and provided that the corporation has
separate entity from Salomon and public documents were available for creditors to know that
debenture exists in the corporation and there is no indication of fraud. Therefore, Salomon
cannot be held personally liable.
Application
Roger is the majority shareholder in United Chemicals Pty Ltd, and he runs it with the
help of his wife and brother. The corporation failed to pay the final instalment of the machine
bought from the Industrial Machines Ltd. The board filed a suit against Roger stating that he

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should be personally liable because he is the majority shareholder. However, a corporation
has separate legal entity for its owners, and its owners have limited liability as given in
Salomon v Salomon & Co Ltd case. Therefore, Roger cannot be held personally liable to pay
for the final instalment of the machine.
Conclusion
To conclude, Roger cannot be held personally liable by the board of Industrial
Machines Ltd because United Chemicals Pty Ltd has a separate legal entity and Roger has
limited liability.

COMMERCIAL LAW 9
Part-2
Issues
Is Roger likely to succeed in changing the decision of the department for rejection of
the licence application of Explosive Industries Pty Ltd?
Law
In specific cases, the court can lift the corporate veil to found out who is controlling a
company to put them liable for the actions of the corporation (CSU LAW504 Modules, 2018,
Topic 14). A corporation has separate legal entity from its owners, and they are protected
under a corporate veil from being held personally liable for its actions. However, the court
can lift the corporate veil to found out who are taking actions in a company and hold them
personally liable for its actions. The provision of lifting a corporate veil was given in Daimler
Co v Continental Tyre and Rubber Co (1916) 2 AC 307 case. In this case, the court used the
principle of lifting of corporate veil because the corporation was created in order to trick the
law. In this case, the government of the United Kingdom prohibits the trading with Germans
during WW1. The court provided a judgement that a company which is registered in the UK
but controlled by Germans is constituted as an enemy.
Application
Roger is a convicted theft, and he cannot receive a licence of explosive
manufacturing. In order to escape the effect of the law, he established Explosive Industries
Pty Ltd in which he was the majority shareholder and applied for the licence. The department
rejected the application and Roger cannot turn the decision of the department because based
on the principle of the lifting of corporate veil because it is invalid to use the company as a
way to avoid the law as given in Daimler Co v Continental Tyre and Rubber Co case.
Conclusion
To conclude, Roger will not succeed in changing the decision of the department for
rejection of the licence because the court can use principle of lifting of corporate veil to see
that the corporation is created just to escape the effect of the law.

COMMERCIAL LAW 10
References
Busch, D., Macgregor, L. & Watts, P. (2015). Agency Law in Commercial Practice. (1st ed.).
England: Oxford University Press. pp. 61-62.
CSU LAW504 Modules, 2018, Topic 12
CSU LAW504 Modules, 2018, Topic 14
Daimler Co v Continental Tyre and Rubber Co (1916) 2 AC 307
Freeman & Lockyer v Buckhurst Park Properties (1964) 1 ALL ER 630
Munday, R. & Munday, R.J.C. (2010). Agency: Law and Principles. England: Oxford
University Press. pp. 245-246.
Salomon v Salomon & Co Ltd (1897) AC 22
Siu Yin Kwan v Eastern Insurance Co Ltd (1994) 2 AC 199
Watteau v Fenwick (1893) 1 QB 346