Business and Corporation Law: Intelligence Assignment

This assignment discusses the different transactions done by Forthryrt with various parties and checks whether any contract is binding to him and if yes then when such contract has been concluded. It also discusses the legal position of Mercedes with respect to a breach of duty of care under the statute and common law, and whether Gregg breached the duty of care and can be held liable for insolvent trading.

Business and Corporation Law
9 / 1 3 / 2 0 1 9
Student’s Name

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Contents
Part A..........................................................................................................................................2
Question 2...............................................................................................................................2
Issue.....................................................................................................................................2
Rules....................................................................................................................................2
Application............................................................................................................................3
Conclusion............................................................................................................................5
Part B..........................................................................................................................................5
Question 2...............................................................................................................................5
(a) (i)........................................................................................................................................5
Issue.....................................................................................................................................5
Rules....................................................................................................................................5
Application............................................................................................................................6
Conclusion............................................................................................................................6
(a) (ii)........................................................................................................................................6
Issue.....................................................................................................................................6
Rules....................................................................................................................................6
Application............................................................................................................................7
Conclusion............................................................................................................................7
(a) (iii).......................................................................................................................................8
Issue.....................................................................................................................................8
Rules....................................................................................................................................8
Application............................................................................................................................8
Conclusion............................................................................................................................9
(b).............................................................................................................................................9
Issue.....................................................................................................................................9
Rules....................................................................................................................................9
Application............................................................................................................................9
Conclusion..........................................................................................................................10
Bibliography..............................................................................................................................11
Books/Journals......................................................................................................................11
Case Laws.............................................................................................................................11

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Other Resources....................................................................................................................11
Legislation..............................................................................................................................11

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Part A
Question 2
Issue
To advice Forthryrt regarding different transactions that have been done by him with various
parties in the given scenario? Further to check whether any contract is binding to him and if
yes then when such contract has been concluded.
Rules
For a valid contract, few elements need to be there which are commonly known as essentials
of a contract. These elements need to exist in each contract that too according to the rules
prescribe for them under contract law. Firstly, the element named offer comes in a contract.
An offer can be related to anything that is valid and legal under the law. It is a proposal to do
an act or not to do the same for the exchange of a monetary value or something else. A valid
offer is the one that is completed in every aspect. It means the terms of an offer should be
clear. Sometimes parties do not make any offer but shows their willingness to develop a
contract and invite offers to consider and accept. Such an invite offer is known as an invitation
to treat under contract law. The second party who come across an invitation to treat is
generally required to make an offer. The lead difference between an invitation to treat and
offer is that offer is certain and communicated to a specific person whereas an invitation to
treat is general in nature and open to everyone. Offer can be accepted but an invitation to
treat does not1.
Another element of a contract is an acceptance that is also known as consent. Unless the
person to whom an offer has been made accepts the same, an agreement cannot be
1 Duhaime.org, Duhaime's Law Dictionary (Duhaime.org) <
http://www.duhaime.org/LegalDictionary/I/InvitationtoTreat.aspx>.

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developed. Acceptance seems to be valid when it is according to the rules of contract law.
The very first requirement is that acceptance must be communicated to the person who made
the offer. As per the decision was given in the case of Felthouse v Bindley2, the silence of an
offeree cannot be considered as an acceptance3. The second rule demands an acceptance to
match the terms of an offer. Several times, offeree accepts the offer but not for the terms
mentioned in the original offer and makes some changes in the same. If terms under an offer
and acceptance differ then such condition leads to a counter offer. The decision was given in
the case of Hyde v Wrench4 is important where the court provided that a counteroffer cancel
all the previous offer of a transaction or negotiation5. Lastly, consent must be certain.
Acceptance can also be submitted through conduct. It means it must be final and be able to
determine the terms to what parties have agreed to. In addition to the offer and acceptance,
some other elements are also there which includes a consideration, the intention of parties to
create legal relation and capacity of parties. In case of commercial agreements, such
intention assumes to be there as decided in Esso Petroleum v Commissioners of Customs &
Excise6. If these elements exist in a contract then as soon as a person accepts the offer
considering above-mentioned conditions, a contract is developed between offeror and
offeree.
Application
In the case presented hereby, many of the parties are involved. A person named Frederick
Forthryrt was an author of the novel named The Day of the Yokel and different publishers
contacted him to publish his book under their publication house. The very first party who
contacted to Forthryrt was Boswold, the chief editor of Boswold Books. Forthryrt replied him
2 Felthouse v Bindley [1862] EWHC CP J35
3 Mindy Chen-Wishart, Contract Law (Oxford University Press, 2012), 67.
4 Hyde v Wrench (1840) 49 ER 132
5 Richard Stone and James Devenney, Text, Cases and Materials on Contract Law (Routledge, 2014), 53.
6 Esso Petroleum v Commissioners of Customs & Excise [1976] 1 WLR 1

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with his intention to sell the book not less than for 40 grand. It was an invitation to treat
because no particular consideration was there but an intention to create a contract. In reply to
the invitation to treat Boswold sent an offer to Forthryrt where he offered to publish the novel
written by Frederick Forthryrt in consideration of $40,000. It was an offer as the terms of same
was clear and addressed to the specific person. In response to this offer, Forthryrt was
required to accept this offer to develop contacts. Instead of accepting this offer, Forthryrt
stated that another party was offering him $50000. After this statement, Boswold revised the
consideration as $45000 and informed Forthryrt about the same on call. It was a counteroffer
from Boswold. On receipt of such offer, Forthryrt corrected the written contract and signed the
same. This cannot be understood as acceptance because Forthryrt made changes in the
original terms of the contract. It was again a counteroffer that has been sent by Forthryrt to
Boswold for the final acceptance. Further, nothing is mentioned about the acceptance by
Boswold it is to state the no contract has been developed between Forthryrt and Boswold.
Another party is Metro Publishers made an offer to Forthryrt to publish his book in
consideration of $50,000 but no contract has been developed with this party since Forthryrt
did not provide any consent. Further, another party named Havoc Film contacted Forthryrt
and $45,000 for the rights of his book. Forthryrt accepted this offer but made certain
condition regarding his right to decide the actor who would play a lead role in the film. This
was a counteroffer rather than an acceptance that was required to be accepted by Havoc Film
but has not been. Therefore, no contact has developed between the parties.
Lastly, when Forthryrt went the post office to send counter offer to Boswold by making
changes in the written contract, he met another publisher named Pickwick who offered to
publish the book written by Pickwick Forthryrt by offering a cheque worth $45,000. It was a
valid offer where consideration was there. Further parties of the contract could enter into the

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contract. As it was a commercial agreement, hence applying the provisions of Esso
Petroleum v Commissioners of Customs & Excise, an intention to create legal relationship
assumed to be there. It was an acceptance through conduct.
Conclusion
As all the elements of the contract presented there hence as soon as Forthryrt shook hands
of the deal, a contract was formed between Forthryrt and Pickwick.
Part B
Question 2
(a) (i)
Issue
To check the legal position of Mercedes with respect to a breach of duty of care under the
statute and common law.
Rules
Being on such a significant position, directors have certain duties/obligations, which are given
under Common law as well as statutory law. The directors of the Australian company, such
statutory duty may be found under Corporations Act 20017. Duty of care and diligence is one
of such significant duty. Starting from the discussion of this duty mentioned under
general/common law, this is to state that every director and officer of the company must
perform their role with diligence and care. In those cases where the said individuals behave,
negligently while carrying their duties they may be held liable to pay the compensation to the
company.
7 Corporations Act 2001 (Cth).

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Similar to common law, section 180 (1) of the act states that every director, as well as each
officer of the company, must adhere with care and diligence while performing their duties in a
manner similar to a reasonable person8. Here the important thing to notice is that the studied
duty applies to every director/officer of the company irrespective of the office held by them
and hence applies to non-executive directors as well.
Application
Mercedes doubted the appropriateness of proposal made by anther director Felix; still, she
behaved negligently and did not bother to take reasonable steps to know the truth. Even after
not being confident, enough she approved the resolution of buying new store and acted
negligently.
Conclusion
Mercedes seems to be liable for breach of duty of care under common law and statute.
(a) (ii)
Issue
Can the decision of Mercedes to agree with purchase of new store be protected under
Section 180(2) of CA 2001.
Rules
Section 180 (2) is another important subsection which again highlights the duties of each
director and officer of the company including non-executive directors. The section makes it
focus on business judgment rule. The section says that any director or officer, who makes a
business judgment on behalf of the company, assumes to carry their duties as per care and
diligence if they
8 Austlii.edu.au, Corporations Act 2001 - Sect 180 (Austili) <
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html>.

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 make the judgment for proper purposes considering good faith of the company and
 does not carry any personal interest in the judgment and
 make themselves informed about the appropriateness of subject matter similar to a
reasonable person and
 Believes that such decision contains the best interest of the company9
It means while making any business decision, directors/officers must consider the above-
mentioned point.
Application
In the case given hereby, Mercedes agrees to the decision of purchasing a new store. This
was a business judgment, which was required to be made according to the provisions of
section 180(2). Nevertheless, she failed to do so as she did not make herself informed with
respect to the appropriateness of subject matter. She failed to make the proper inquiry of
subject matter. Secondly, she did not have a rational belief that the decision was in the best
interest of the company.
Conclusion
Here the decision of Mercedes to agree to the purchase of the new store cannot be protected
by section 180 (2) as the same lacked provisions of business judgment rule.
(a) (iii)
Issue
If Joystick becomes insolvent, then whether Mercedes can find liable for breach of section
588G of CA 2001.
9 Legislation.gov.au, Corporations Act 2001 (Australia Government) <
https://www.legislation.gov.au/Details/C2018C00424>.

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Rules
As per section 588G of the act, if a company incurs a debt where the same is insolvent or is
likely to become insolvent after incurring such debt then a director held liable for insolvent
trading if there were reasonable grounds to suspect such insolvency and the matter
happened after the commencement of the act. Sections 588H of the act prescribe certain
defenses that can be claimed by directors to avoid the liability of insolvent trading under
section 588G. As per one of the defense, a director cannot be held liable if the same does not
take part in the management of the company due to being ill or any other good reason. In the
case of ASIC v Plymin, Elliott & Harrison10, non-executive director of the company liable for
insolvent trading. It means non-executive directors cannot take the defense of their non-
engagement in the affairs of the business.
Application
Mercedes was a non-executive director of the company hence had liability under section
588G. She was somewhere aware of the poor performance of the company. While proposing
the agenda of buying new store, Felix stated that it is expected to be a solution to all the
problems of the company. Here again, Mercedes had reason to believe that some issues
were there in the company but she did not take the steps to suspect the chance of insolvency.
She cannot take the defense of being irregular from the management of the company since
the reason behind the same was not an illness or any good reason.
Conclusion
Since Mercedes failed to suspect insolvency and agreed to incurred debt by the company
hence can be held liable for insolvent trading under section 588G.
10 ASIC v Plymin, Elliott & Harrison - [2003] VSC 123

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(b)
Issue
Whether Gregg breached the duty of care? Whether the same can be held liable for insolvent
trading.
Rules
As discussed above, section 180 (1) demands every director and officer to behave in a caring
and diligent manner. It means no managerial personnel of the company must be negligence
in the performance in his/her duty. Further section 588G held each director liable if even after
having knowledge of reason of belief of insolvency or prospected insolvency of the company,
he/she let the company incurring new debt11. No defense is available with respect to the less
knowledge of financial matters of the company to a director. Further section 588H states that
director can avoid the liability as based on information provided to him/her it shows that the
company was solvent. Such information must be provided by a reliable and competent person
Application
Being a director of the company, Gregg had the same liability as to any other director. He did
not take reasonable steps to check the consequences of the decision and simply believed in
the recommendations of Felix. By doing so he performed his duty negligently and can be held
liable for the breach of duty of care.
Further, no defense-related to limited knowledge of director of financial matters is mentioned
under section 588G hence Gregg had liability to prevent the company by incurring debt where
he had reason to believe that company was likely to be insolvent being a director of the
company. No reliable person showed him that the company was solvent.
11 Iknow.cch.com.au, Insolvent trading (Wolters Kulwer)
<https://iknow.cch.com.au/topic/tlp1758/overview/insolvent-trading>.

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Conclusion
Gregg seems liable to breach the duty of care and also liable for insolvent trading.

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Bibliography
Books/Journals
Stone, Richard and James Devenney, Text, Cases and Materials on Contract Law
(Routledge, 2014)
Wishart, Mindy Chen, Contract Law (Oxford University Press, 2012)
Case Laws
ASIC v Plymin, Elliott & Harrison - [2003] VSC 123
Esso Petroleum v Commissioners of Customs & Excise [1976] 1 WLR 1
Felthouse v Bindley [1862] EWHC CP J35
Hyde v Wrench (1840) 49 ER 132
Other Resources
Austlii.edu.au, Corporations Act 2001 - Sect 180 (Austili) <
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html>
Duhaime.org, Duhaime's Law Dictionary (Duhaime.org) <
http://www.duhaime.org/LegalDictionary/I/InvitationtoTreat.aspx>.
Iknow.cch.com.au, Insolvent trading (Wolters Kulwer)
<https://iknow.cch.com.au/topic/tlp1758/overview/insolvent-trading>
Legislation.gov.au, Corporations Act 2001 (Australia Government) <
https://www.legislation.gov.au/Details/C2018C00424>

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Legislation
Corporations Act 2001 (Cth)