Business and Corporate Law: Vicarious Liability, Privity of Contract, Restraint of Trade, Types of Companies in Australia

This article discusses the legal concepts of vicarious liability, privity of contract, and restraint of trade in the context of business and corporate law. It also provides an overview of the different types of companies in Australia, including proprietary companies, public companies, and unlimited companies. The article concludes with a discussion of the words and phrases that cannot be registered as company names.

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Business and Corporate Law

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Part A
Issue
Martin is an employee of Swimmingpool Co, and he was entering into contracts with clients
on behalf of the company. Later it was found out that Martin was giving wrong advice to
clients, and he also did not deposit all the money to the company’s bank account. Thus, the
first key issue raised in this case is whether Swimmingpool Co can be held liable based on
vicarious liability. Since the clients have received wrong advice from Martin, and he has also
taken their money rather than depositing into the bank account of the company, the second
issue raised whether the element of privity of contract applies in this scenario. The job of
Martin was to quote the prices to customers regarding construction of pools and forming
contracts on behalf of the company. He was also authorised to deposit the money into the
bank which is paid by the customers. Therefore, the third issue raised in this case is whether
the conduct of Martin is outside the terms of the employment and whether any actions can
be taken against him by Swimmingpool Co. It was also found out that Martin is planning to
start his new business in order to compete with Swimmingpool Co. Therefore, the fourth
issue raised in this case is whether Swimmingpool Co can impose a restraint of trade on the
new business of Martin.
Rule
The doctrine of vicarious liability provides that a person can be held liable for the torts of
another individual even if such person has not committed the act itself. The principle applies
in the case of employer and employee relationship. It provides that the employer is held
liable in case the employee has failed to ensure care which resulted in causing damages to
third parties. In New South Wales v Lepore (2003) HCA 4 case, the court provided that a
negligent act of the employee which is committed during the ordinary course of
employment will result in holding the employer liable (Giliker, 2013). Moreover, this
doctrine did not exclude the liability of the employee, and the employer can hold him liable
to recover the damages paid as given in Lister v Romford Ice & Cold Storage (1957) AC 555
case (Arizon and Semark, 2014). In common law, the doctrine of privity of contract applies
which provides that rights and obligations of a contract cannot be imposed on a party who is

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not part of the contract. This principle was recognised in Tweddle v Atkinson (1861) 1 B&S
393 case in which the court rejected the claim for recovering of the benefit of the contract
by a third party (Liu, 2015). Another key element is that if the employee acts outside the
terms of employment, then the employer has the right to hold the employee liable for its
actions and demand compensation for violation of any employment terms (Fitzpatrick et al.,
2017). Furthermore, in Smith v Nomad Modular Building Pty Ltd (2007) WASCA 169 case,
the court provided that a post-employment restraint clause can be implemented on an
employee if the legitimate interests of the employer should be violated which include
leaking of trade secrets, losing of customers, staff members and others (Nicholls, 2015).
Application
In the given scenario, Martin was working as a salaried employee for Swimmingpool Co, and
he was forming contracts on behalf of the company. Martin has failed to provide correct
information to the clients due to which they suffered losses as their pools are sinking into
the ground. Martin also took the money paid by customers and did not deposit into the
bank account of the company. Based on these facts, Swimmingpool Co can be held liable for
vicarious liability due to the failure of Martin to maintain a standard of care (New South
Wales v Lepore). The contract was formed by Martin on behalf of the company; therefore,
he is not the part of the contract. Thus, based on the principle of privity of contract, he
cannot be held personally liable by the customers to pay for the damages (Tweedle v
Atkinson). Since Martin violated the terms of his employment agreement by giving false
information and failing to deposit the money in the company’s bank account. Therefore,
Swimmingpool Co has the right to hold Martin liable for violating the terms of the
employment contract since his liabilities are not excluded based on the vicarious liability
(Lister v Romford Ice & Cold Storage). Martin is opening a new business which can adversely
affect the operations of Swimmingpool Co because Martin can take the customers with him
and leak the trade secrets. He also acted on behalf of the company which a mislead
customers to sign a contract with him, thus, Swimmingpool Co can impose restraints of
trade on him to stop him from setting up a rival business (Smith v Nomad Modular Building
Pty Ltd).

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Conclusion
In conclusion, Swimmingpool Co can be held liable by customers for the negligence of
Martin under the doctrine of vicarious liability. Customers can file a suit to recover their
damages against the company rather than Martin himself. Martin is not the part of the
contract formed between the company and its customers since he was merely acting on
behalf of Swimmingpool Co. Therefore, the rights and obligations of the contract cannot be
imposed on him based on the principle of privity of contract. Moreover, the terms of the
employment contract are violated by Martin because he took the money of its customers
rather than deposit it into the bank. He also provided wrong advice to customers; therefore,
Swimmingpool Co can hold him personally liable to recover the damages paid by the
company to its customers. Lastly, it is valid to impose restraints of trade on Martin because
he can take the clients of the company with him and leak the trade secrets which can
adversely affect the operations of Swimmingpool Co.

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Part B
Types of companies in Australia
1. Proprietary company A privately held corporation which cannot
issue its shares in the public.
2. Proprietary companies limited by
shares
Shareholders in these companies have
limited liability which is limited to the value
of their shares (eCompanies, 2018).
3. Unlimited proprietary companies The liability of members of these companies
is unlimited.
4. Public companies The public companies are authorised to issue
their share in the public to raise capital for
their operations.
5. Public companies limited by share The liability of members is limited to the
value of shares.
6. Public companies limited by
guarantee
Members can guarantee a fixed amount
which is given at the time of wound up.
7. Unlimited public companies The liability of members is unlimited.
8. No liability companies Formed only for principal activities which
include mining or resource exploration.
Best Suited Company
In the given scenario, the selection of a proprietary limited company is the most suitable
option while registering the company with ASIC. The company will be able to raise capital by
issuing its shares in case a public company is formed. However, the legal formalities of a
public company are complex, and the enterprise has to face various restrictions which
include preparation and submission of annual reports, holding meetings of directors and
shareholders and others (Fitzpatrick et al., 2017). The entire process is costlier than
compared to registering a proprietary company. The selection of a proprietary corporation
will offer privacy and flexibility in operations. In case of a proprietary company, the
membership of the corporation will be limited to the family members and its operations can

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be governed by introducing a constitution which provides information regarding rights and
duties of members. This option will not be available in case of a public company, thus,
selection of proprietary company is an ideal option in this scenario.
Compare plan – 5 years view
Based on the findings, the following are the key information which is given from the
Australian Securities and Investments Commission and the Corporations Act 2001 (Cth) (CA)
regarding a proprietary company. Section 45A of CA provides there are both small and large
proprietary corporations in Australia which differentiate based on their size and legal
compliances (Fitzpatrick et al., 2017). These corporations are limited by shares or have
unlimited liability of members; they cannot hire 50 non-employee shareholders. Subsection
2 provides that if a company complies with two of the three elements given below, then it is
considered as a small proprietary company (ASIC, 2018a).
1. The consolidated revenue of the enterprise must be less than $25 million in a
financial year.
2. The corporation must have consolidated gross assets of less than $12.5 million in a
particular financial year.
3. The number of employees in the company must be below 50 in a particular financial
year.
Moreover, subsection 3 provides that in case a proprietary company complies with any two
of the following three requirements, then it is considered as a large proprietary company
(Austlii, 2018).
1. In a financial year, the consolidated gross operating revenue of the company must
be $25 million or more.
2. The consolidated gross assets of the enterprise must be $12.5 million or more in a
specific financial year.
3. In a particular year, the corporation should hire 50 or more employees.
According to subsection 5 of the act, the part-time employees hired by the company are
considered as full time while counting the total number of employees for the corporation.

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Based on these regulations, the company formed in this scenario will be considered as a
small proprietary company since the revenue of the enterprise will be below $25 million.
The assets of the company will also be less than $12.5 million as well along with less than 50
employees. Therefore, the company will be considered as a small proprietary corporation.
As per the five year plan, in the fifth year, the assets of the company will be increased to $13
million, and the estimated revenue of the enterprise will be $26 million as well. The number
of employees will be 66 as well which include both full time and part-time employees.
Therefore, the company will be considered as a large proprietary corporation since it
fulfilled all three requirements given under subsection 3 of section 45A of CA. Based on
these facts, the company will have to appoint an auditor, comply with continuous disclosure
and reporting requirements along with lodge its annual reports.
Words and phrases which cannot be registered
While selecting the name of a company, parties cannot choose any names which could
mislead people regarding the activities of the company which include ex-servicemen’s
organisations or Royal Family and others (ASIC, 2018b). Other words such as university,
trust, chamber of commerce and building society are restricted as well. Similar names are
also not approved by ASIC. Following are different words and phrases which are considered
unacceptable to select as the name of the company.
Bank, Banker or Banking Names which are related to financial
institutions require the consent for APRA
(Australian Prudential Regulation Authority).
Made in Australia Consent of government authorities is
required before choosing these names.
Royal Parties are required to apply for ministerial
consent before selecting this word.
Parties can check the availability of their names from the website of ASIC which displays the
available names in green colour, unavailable names in red colour and names which needs
approval from ASIC in amber colour. In case of ‘Anzac Coffee, the name is showing in amber
colour due to which approval of ASIC is required to use this name. The name requires
approval because it shows connection to Australia and a corporation exists with similar

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name which can mislead people. Therefore, approval of ASIC is required before registering
this name.

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References
Arizon, F. and Semark, D. (2014) Maritime Letters of Indemnity. Abingdon: Routledge.
ASIC. (2018a) Are you a large or small proprietary company. [Online] Available at:
https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-
financial-reports/are-you-a-large-or-small-proprietary-company/ [Accessed 19/09/2018].
ASIC. (2018b) Company name availability. [Online] Available at: https://asic.gov.au/for-
business/registering-a-company/steps-to-register-a-company/company-name-availability/
[Accessed 19/09/2018].
Austlii. (2018) Corporations Act 2001 - Sect 45a. [Online] Available at:
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s45a.html [Accessed
19/09/2018].
eCompanies. (2018) Australian companies by type. [Online] Available at:
https://www.ecompanies.com.au/company-registration/resources/different-types-of-
companies/ [Accessed 19/09/2018].
Fitzpatrick, J., Symes, C., Velijanovski, A. and Parker, D. (2017) Business and Corporations
Law. 3rd ed. Chatswood, NSW: LexisNexis Butterworths Australia.
Giliker, P. (2013) Vicarious Liability ‘On the Move’: The English Supreme Court and
Enterprise Liability. Journal of European Tort Law, 4(3), pp.306-313.
Liu, H.Y. (2015) Law’s impunity: Responsibility and the modern private military company.
London: Bloomsbury Publishing.
Nicholls, R. (2015) Restraints of trade: Tips and traps for enforceability. Proctor, The, 35(8),
p.14.