Liability of Companies and Partnerships in Business Law

This article discusses the liability of companies and partnerships in business law. It covers the legal provisions governing pre-incorporation contracts, internal contracts between partners, and the liability of partners for each other's actions. The article also provides case examples to illustrate the application of these provisions.

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Business Law Assignment

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Question 1
Issue
The issue is whether Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd can
personally hold Simon liable for the contractual terms?
Law
The Corporations Act 2001 (Cth) provides key regulations which companies have to comply
with while managing their operations in Australia. The law provides that after its
registration, the company becomes a separate entity. Section 119 provides that this entity
becomes the separate entity on the day when it is registered. Based on such entity, the
enterprise is able to create contractual relationships with third parties under its own name.
As given in Salomon v Salomon & Co Ltd (1897) AC 22 case, the concept of the limited
liability of members and the separate personality of members was established by the court
(CSU LAW504 Modules, 2018, Topic 14). The liability raised in such contracts cannot bind
the shareholders of the company personally liable. Similar views were given by the court in
the case of Lee v Lee’s Air Farming Ltd (1961) AC 12. Since the organisation is a separate
legal entity, the debt owed by it to its creditors cannot bind its members liable to its terms
(CSU LAW504 Modules, 2018, Topic 14). However, the promoters of a company can enter
into a contract on behalf of the enterprise, and these terms are binding on the parties to the
contract. These contracts are formed before the company is registered, thus, they are called
pre-incorporation contracts. These contracts are governed by both common law and the
Corporations Act. The common law provides that these contracts bind the company into its
terms. However, if the enterprise is not registered, then the person who formed the
contract on behalf of the company can be held liable for such contractual liabilities.
Section 131 of the Corporations Act provides provisions regarding the liability of pre-
incorporation contracts. The section provides that the contract which is formed by a party
on behalf of a company which is not yet registered, then such company is bound but the
terms of such contract. The company also has the right to receive the benefits of the
contract which is formed with a third party. Furthermore, the corporation also has the right
to rectify the contractual terms as per the time which is decided by the parties while

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forming the contract. However, subsection 2 of this act provides the liability of the person
who forms the contract on behalf of the enterprise (CSU LAW504 Modules, 2018, Topic 14).
The law provides that an individual who forms a contract on behalf of the company which is
not yet registered can be held personally liable by the third party if the contract did not get
registered. The person would also be held liable in case the company is registered but
decided not to rectify the contractual terms within the specified time limit set by the
parties. Furthermore, section 3 of the act provides that a company which receives certain
benefit from the contract can also hold the party liable who formed the per incorporation
contract on behalf of the enterprise. Section 132 (1) of the act provides that the promoters
of a company can be held liable for the third party regarding the payments of the debts if
another party signed the discharge agreement (CSU LAW504 Modules, 2018, Topic 14).
Application
In this case, Steve created a contract on behalf of WA Gold Exploration Company while
acting as the promoter of the company. The contract was formed with Thor Mining
Machinery Ltd regarding the purchase of a drill. The contract was a pre-incorporation
contract since WA Gold Exploration Company did not register yet based on which the
provisions given under section 131 applies to this case. After incorporation of the company,
the board members of WA Gold Exploration Company filed to rectify the contractual terms
to rescind the contract. The benefit of the contract was rejected by WA Gold Exploration
Company based on which Thor Mining Machinery Ltd can hold Steve liable for payment of
the debt. Therefore, section 131 applies in which case based on which Thor Mining
Machinery Ltd can held Steve personally liable for breaching the contractual terms of the
contract. In the case of Volvo Trucks (Australia) Ltd, the contract was formed after the
registration of WA Gold Exploration Company. As per the provisions given in the case of
Salomon v Salomon & Co Ltd, the company is liable for its own debts, and the shareholders
cannot be held liable for such debt personally. Thus, WA Gold Exploration Company is liable
for its own liabilities, and Volvo Trucks (Australia) Ltd cannot hold Steve liable for the
contract.
Conclusion
To conclude, Thor Mining Machinery Ltd can held Steve liable for breach of the pre-
incorporation contract since WA Gold Exploration Company failed to comply with its terms.

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In case of Volvo Trucks (Australia) Ltd, Steve cannot be held liable since the contract is
formed after the company is incorporated based on which the shareholders cannot be held
personally liable for its debts.

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Question 2
Issue
The issue raised in this case is whether the partnership can be held liable for the contracts
formed by Simon by breaching the internal contract which is formed between partners?
Whether any legal action can be taken by partners against Simon for his actions?
Law
The partnership established in Australia is governed by the provisions of the Partnership Act
1892 NSW. The definition of the partnership is given under section 1 (1) of the act. It is
defined as a relationship formed between two or more parties who jointly decide to run a
business in order to manage the operations in common with an objective to generate profit.
The partnership did not have a separate legal entity, and the partners are jointly and
severally liable for the debts in case the firm failed to repay them. The partners have a
fiduciary duty towards each other based on which they act as the agent for each other.
Section 5 (1) of the act provides that the partners act as the agent for other partners based
on which they can enter into a contractual relationship on behalf of the entire partnership
(CSU LAW504 Modules, 2018, Topic 13). The actions taken by partners during the ordinary
course of business in which they enter into a contract with third parties binds the other
partners liable based on the terms of the contract. The provision of this section did not
apply in case the actions of the partner are outside the scope of the business of the
partnership. Therefore, section 5 (1) only applies when the actions of the partners are
within the ordinary course of business of the partnership.
Section 5 (2) of the act provides that the actions of the partners must come under the
definition of business conducted in the “usual way”. The actions which are outside the
scope of the business as usual did not bind other partners in terms of the contract which is
formed by a partner while acting outside the scope of the business. Section 7 provides that
the actions of a partner which are outside the scope of the business can bind other partners
liable in case the actions are taken by the partner based on an expressed authority which
was given based on the agreement between partners (CSU LAW504 Modules, 2018, Topic
13). Thus, the contract which is formed by the partner for any personal liability cannot hold

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other partners liable. According to section 8 of the act, if an internal contract is formed
between partners that restrict the liability of partners to enter into contractual
relationships, then other partners cannot be held liable under the terms of such contract
only if the third party is aware of such contract. In case the third party is not aware of the
internal contract formed between the partners, then all the partners are liable as per the
provisions given under such contract.
A good example was given in Mercantile Credit Ltd v Garrod (1962) 3 All ER 1103 case; in this
case, parties entered into a contractual relationship for a garbage business in which they
form an internal contract in which they decided that they will not purchase or sell cars (CSU
LAW504 Modules, 2018, Topic 13). However, one partner sold a car to a third party based
on the partnership business. The court provided that since the third party was not aware of
the contractual agreement and selling of a car comes under the ordinary course of business
both partners are liable under the contract. Section 9 (1) provides that the partners’ joint
liability in the business can be discharged when the liability of a partner is discharged.
Section 10 of the act provides that all partners in a firm are liable towards the torts
committed by a single partner while acting within the ordinary course of business. In
Polkinghorne v Holland & Whitington (1934) 51 CLR 143 case, a partner used the money of
the law firm to establish a sham company (CSU LAW504 Modules, 2018, Topic 13). The fraud
was conducted by the partner during the ordinary course of business based on which the
court provided that all partners are liable for the tort committed by a single partner.
Application
In this case, an internal contract formed between Simon, George, Sara, and Mary based on
which they decided that approval of all members will be necessary while investing more
than $10,000 of the partnership money. Simon purchased a 50TB hard drive on behalf of the
partnership which was worth $15,000 from Sunstar Computer Hardware. Although an
internal contract was formed between the partners to get the approval of other partners
while investing more than $10,000, however, Simon did not ask for the permission of other
partners. However, Sunstar Computer Hardware was not aware of the internal contract of
the partnership; thus, all partners are liable as per the terms of the contract (Mercantile
Credit Ltd v Garrod). In case of You Beaut Ute Ltd, Simon purchased a second-hand Ute on
behalf of the partnership for $9000. Simon acted outside the scope of the partnership based

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on which other partners are liable for the contractual relationship formed by him as given
under section 5 of the act. Since Simon acted by breaching the internal contract of the
partnership, other partners can claim compensation from him.
Conclusion
To conclude, Sunstar Computer Hardware can hold other partners liable for the contract,
however, You Beaut Ute Ltd can only held Simon liable for the contract since he acted
outside the scope of the business. Simon can be held personally liable for breaching the
internal contract formed between the partners.

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References
Corporations Act 2001 (Cth)
CSU LAW504 Modules, 2018
Lee v Lee’s Air Farming Ltd (1961) AC 12
Mercantile Credit Ltd v Garrod (1962) 3 All ER 1103
Partnership Act 1892 NSW
Polkinghorne v Holland & Whitington (1934) 51 CLR 143
Salomon v Salomon & Co Ltd (1897) AC 22